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Hi Allen,
I kind of hate to bring this up in this particular forum, but I have found one way to deal with a very low volatility ETF. About 30 years ago I was studying to earn a professional financial designation. Part of the study was money management. One method of money management we studied was called "Constant Dollar" financial management. I have seen this method also called "Constant Value" and "Core Position Trading". I used this money management method for many years before I came across Mr. Lichello's book in 2004.
This money management method will have someone buy and sell around a Constant Dollar amount or a Core Position amount.
Assume that one decides the minimum transaction amount they want to trade is $1,000. Assume that they decide they will trade whenever the value of the Core Position or Constant Dollar moves 10% (their trade "Trigger") in either direction. Assume that they want to buy $10,000 of an ETF and the share price is $50 at the time of purchase; so they purchase 200 shares.
Next assume that the value of their ETF increases 10% to $11,000. They would then sell $1,000 worth or roughly 18 shares.....no "SAFE" amount is used in the calculation. This transaction would move their Core Position back down to the $10,000 range, which was their original purchase.
On the other hand, assume that their Core Position declined in value by 10%, down to $9,000. They would then buy $1,000 worth of shares to bring the value of the Core Position back up to their original purchase value of $10,000. In this case the share price declined in value 10%, down to $45. They would buy approximately 22 shares to get their Core Position back to the original value of $10,000.
No "SAFEs" are used in this money management method, which is why I kind of hesitate to mention it on this forum.
It is a very simplistic method of investing. Using AIM methods with SAFEs one will usually have a holding zone of approximately 30%. Constant Dollar investing can have any amount of holding zone someone chooses. Assume that an ETF has had a 15% high - low range each year for many years. Personally if I saw something like this I would probably choose a 5% to 7% change in Core Position value to "Trigger" a transaction of $1,000. Others can choose any "Trigger" percentage they want. There are no set rules for this type of investing.
I still use this money management method with one very large position in a monthly income producing closed-end fund which has very low volatility. I have had this position for many years. A couple of years I have gotten only one or two trade transactions the entire year. If I lowered the percentage change amount to "Trigger" a trade I could get more transactions, but I am happy with the 10% Trigger I have been using. I learned to use 10% Triggers over 30 years ago and it is hard for me to change this mindset. Besides I am happy with my results.
Personally I would use this method of money management with a very low volatility fund or stock which I intended to hold for many years.
To all the forum members I apologize for bringing this method up since this forum is dedicated to AIM, however I thought I would pass this along to Allen since he is struggling with how to set up a low volatility money management program.
Best regards,
Ray
Hi Tf,
Did some PerfCharts comparing TMF and TLT. For the majority of the time periods checked it appears that TMF performs more than 3X greater than TLT, which is supposed to be the leverage it employs. Thus, it would seem to me that option #3....the re balancing between the two...is the better option.
Best regards,
Ray
Hi Ken,
I think the markets have been anticipating this action for a few weeks so it did not shake the markets much.
Yesterday I bought a small amount of EWO (Austria) because of its chart. I bought it for the purpose of a swing trade instead of LD-Aiming it. The stop loss I placed on it is just below recent support, so it is kind of a tight stop. This is the only trade I have taken with this possible ECB action in mind.
Was just reading some commentary over at Fidelity. A large number of 'experts' (whatever they are) do not feel that the European QE will have as much impact on the economy there as it did in the U.S. for a number of reasons which are above my pay grade and that I do not understand.
Best regards,
Ray
In my opinion this newsletter from yesterday is interesting. It points out the importance of the January 22nd meeting of the European Central Bank to what could possibly happen in global markets:
http://www.streetsmartreport.com/The%20ECB%20Will%20Be%20A%20Big%20Factor%20In%202015's%20First%20Half.html
Especially the part about what could happen if they fail to act.
Regards,
Ray
Hi Tf,
On a serious note I don't personally know anything about this subject. It is getting on the outer reaches of technical analysis for someone like me.
However, I did go over to Amazon to see what kind of books are available and what kind of reviews they were getting. This book caught my eye.
http://www.amazon.com/Fibonacci-Analysis-Constance-Brown/dp/1576602613/ref=sr_1_6_twi_2?s=books&ie=UTF8&qid=1418859580&sr=1-6&keywords=fibonacci#customerReviews
As I said, I know nothing about this. Maybe someone else who has tried it can chime in.
Best regards,
Ray
Thanks Clive,
I have Excel and the other Microsoft Office applications software.
I will experiment around with it.
Again thanks,
Ray
Hi jaiml,
Thanks for the offer. I will let you know if I want some backtesting. Recently I have been doing some LD-AIMing with a few leveraged ETFs. Good success so far using these for what I consider short-term holdings. I might want some backtesting on one or more of these ETFs.
Have you thought of maybe developing the software for sale? I for one would be a ready customer for you if it worked on a Windows 7 operating system.
Best regards,
Ray
Hi jaiml,
Just an off topic side note question. What AIM software program are you using for your screen shot?
It looks like it could be very useful for me since I am mathematically challenged.
Best regards,
Ray
Hello Allen,
I think that if you go to the websites of the ETF fund families you will see that they warn investors of the very same thing…..especially the prospectuses of the various leveraged and inverse ETFs. The following is a warning from the Direxion webpage Overview for the small-cap leveraged ETFs.
http://www.direxioninvestments.com/products/direxion-daily-small-cap-bull-3x-etf
_______________________________________________________________
These leveraged ETFs seek a return that is +300% or -300% of the return of their benchmark index for a single day. The funds should not be expected to provide three times or negative three times the return of the benchmark’s cumulative return for periods greater than a day.
_______________________________________________________________
So you can see that once you hold a leveraged ETF beyond one day you can and will get the same tracking error mentioned in this articles examples.
On the other hand, if an AIM investor is using leveraged ETFs for the Volatility Capture portion of the AIM money management system then the volatile nature of these ETFs can work to their advantage compared to unleveraged ETFs. After a discussion about them here a few months ago I used a couple in LD-AIM programs. I began each program with only 2 sells and was pleased with the results. Sold out fairly quickly and went on to something else. Personally, I would not use them in a regular AIM program which is very similar to Buy-and-Hold because of the warnings mentioned in your article and warnings posted by the sellers of these leveraged ETFs.
Regards,
Ray
Hi Tom....Re: Williams%R
This indicator is always very helpful to me whenever I use it. The ChartSchool article does suggest that it should be used with other indicators:
"Like all technical indicators, it is important to use the Williams %R in conjunction with other technical analysis tools".
I like to use it with daily charts and change the default setting of 14 to a 28 day setting. I have found in doing it that way a 28 day "bigger picture" view of a particular stock or the market is presented. Also, with a 28 day setting I have found that it now closely correlates to a 50 day Simple Moving Average (SMA)...though they are not perfectly correlated.
Another thing I watch, along with the 50 day SMA and the Williams %R, is the Volume being traded. If the indicators being followed rise out of an OverSold condition and the stock price crosses above the 50 day SMA, I also like to see if Volume is also confirming the move and there is a large participation in the move higher.
Of course, using Volume as a technical indicator is very subjective. As far as I am concerned there are no set rules when using Volume as a technical indicator. I just like to watch the recent days Volume. Usually a "decline" volume day is higher than an "up" volume day because down days are more volatile, however there are exceptions to this. Personally I just like to see if the Volume being traded on any particular "up" day is as good or better than the more recent "up" volume days. If so, it suggests to me that the path to least resistance is now on the up side. However, if there is a move up and the Volume is weak then resistance could be around the corner and more thought should be given to making the trade.
In my opinion all technical analysis is subjective, but reading Volume is more subjective than other technical indicators.
The one thing which I have learned over the years is that there is no one perfect technical indicator and any technical indicator should not be used as a stand alone trigger to any trade....Buy or Sell.
Best regards,
Ray
Hi Allen....Re: Williams %R
I think I read all the replies to your question about the Williams %R technical indicator, but am not sure. Therefore if I am repeating something someone else has sent to you then I apologize for being redundant.
On the StockCharts.com website at the top of the page you can find their "ChartSchool" between their "Free Charts" tab and their "Blog" tab.
http://stockcharts.com/
When you click on the "ChartSchool" tab near the top it will then take you to this page.
http://stockcharts.com/school/doku.php?id=chart_school
Near the upper right hand side of ChartSchool page you will find a section called "ChartSchool Contents". There you will see a "Glossary" section.
http://stockcharts.com/school/doku.php?id=chart_school:glossary_a
When you click on the Glossary it will take you to a page where you will see that they have arranged an explanation of each of the technical indicators alphabetically. Go ahead and click on the "W" near the top of this page.
http://stockcharts.com/school/doku.php?id=chart_school:glossary_w
Scroll down that page of the indicators beginning with the letter "W" and you will come to a paragraph which gives a brief explanation about the Williams%R technical indicator. At the end of the paragraph, you will see where it says "See ChartSchool article on Williams %R". Click on "Williams %R" in that sentence and this should take you to an article with a complete explanation of this technical indicator; how it is calculated, explanations of use, etc.
http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:williams_r
Again I hope this reply from me is not repeating what you learned from someone else and I hope this helps you.
Best regards,
Ray
Re: Fear & Greed Index
It has a current reading of around '5'....this is the lowest Extreme Fear reading I can recall seeing with this indicator.
http://money.cnn.com/data/fear-and-greed/?iid=EL
Ray
Hi Steve,
____________________________
"BTW: I'm seeing a lot or articles about how toppy the market is right now. Words like 'Bubble' 'Correction Due', and phrases like 'third biggest bubble since records began.' The other two being I think 1904 and 1999"
____________________________
One metric I think that those articles might be referring to is the Shiller PE10 ratio.
http://www.multpl.com/shiller-pe/
It is currently at 26.21. This is just about as high as it was when the bear market began in 2008 and almost as high as it was in 1929. It still has a way to go before it gets as high as it was in 1999 when its maximum PE10 ratio was 44.20.
The Mean for the Shiller PE10 ratio is 16.55 and the Median is 15.93. So the current reading of 26.21 is really "toppy" compared to its Mean and Median.
Of course, I could be wrong about what metrics the authors of those articles are using for those comments.
Best regards,
Ray
Hi Steve,
That sounds about right. My next door neighbor has a 5 inch rain gauge on his deck and it filled up in a hurry. In the pecan orchard behind our house there is a low area. Today it looks like a lake.
As you know we needed it....just not all at once.
How is it going with you? We need to get together again at Chili's one day. Or, this time I can come to your home area.
Best regards,
Ray
Thanks, Tf.
I will give that some thought.
btw, usually when I give a subject this much thought I usually end up doing nothing. That has been my MO over the years.
Thanks again for all your suggestions. They have given me a lot to think about.
Best regards,
Ray
Hi Tf,
I understand what you are saying and what you said is exactly what I have given a lot of thought to lately. There are a lot of things to consider and these are the reasons I haven't done it yet.
I don't think I made myself clear. The Put I have thought about is on the SPY option. SPY is the S&P 500 ETF. I think when I said a "stock-like substitute" I muddied the water. This would not be a on an individual stock. It would be like using an inverse fund...such as SH...to hedge a small portion of "all" my fund holdings. I haven't AIMed an individual stock in some time now. Therefore, if I wanted to sell one fund and buy another the SPY Put would not have any effect because a market decline usually effects all mutual funds and ETFs...just some more than others.
The big thing is that the Put option would be cheaper than buying SH or some other inverse bear market fund. It would free up more of my Cash than if I had bought an inverse bear fund.
If I went ahead and did this the purpose would be to use a very small portion....no more than 5% of my current Cash position....to earn some money in the event of a market decline. Cash has now built up to about 55% in my IRA.
To repeat what I said, I had already thought about all the things you mentioned. Those are the reasons I haven't done it. Just pondering and getting all the information I can before doing it.
Thanks for all your help on options. Options are a complicated subject (which I find interesting). Since they are so complicated the only action I have taken is to sell a few Covered Calls. Heaven knows I can use all the help on this subject that I can get.
Best regards,
Ray
My goal would be to hedge some of my long positions. This market has come a very long way. With the economy showing some weakness (negative first quarter GDP and the housing market slowing down) I got thinking about putting some of my cash to work on the hedge side.
Buying deep in the money is very similar to buying a stock substitute.....especially with a Delta close to 1 (or minus 1 in the case of a Put).
Just thinking. No action yet.
btw, this would be in an IRA if I did do it.
Again, just pondering this action.
Take care,
Ray
Hi Toofuzzy.....Thanks for the info.
Options are a learning process for me. Just started learning about them about this time last year. Sold some covered calls this past winter on some ETFs which I was about to sell anyway. One got exercised and called away on me. Have no interest in doing any spread trading. I am 72 and that seems to be too much work for just a few rewards for this old man. If I ever do any more option trading it will be some directional trades. Recently I have been thinking about buying a few very deep ITM puts on SPY with a March 20, 2015 expiration date. Not yet decided yet. Need to do more research.
Again, thanks.
Ray
An Addendum...
Hi Tf,
I think where my confusion came from is when I look at an option chain.
For instance, I am currently looking at a Fidelity option chain for IWM...the Russell 2000 ETF.
IWM closed at $118.25.
When I look at the option chain of March 31, 2015 it shows there is no Open Interest for the 90 Strike Call Options. None have been traded yet. However, it shows a $28.26 Bid price and a $28.70 Ask price with a Delta of .9657 and Implied Volatility of 17.87%.
Since there has not yet been any Call activity at this price (no open interest) I just assumed that the Bid and Ask prices have been created by the clearing member (market maker).
If I put in a bid to buy a Call at the shown $28.70 Ask price I am quite sure the transaction would be completed, if the market was open and options were being traded. I just assumed that the clearing member for the OCC would complete this order and would be the one selling me this call instead of another investor. Guess that is where I went wrong in my assumptions.
Best regards,
Ray
Hi Tf.....Thanks.
I thought it meant that if there were no contracts available at the time I wanted to buy then the clearing member (market maker) would create and sell me a contract if they wanted to accept my bid. Guess I read it wrong.
As I previously said, I could have been wrong in my assumption.
Back to the Greed & Fear Index....the Put/Call Option portion of the Index just measures the spread between the number of Call options traded versus the number of Put options traded. They just look at the volume traded in Call option buying versus the volume of Put option buying. A Demand versus Supply thing.
I assume that this is the information which goes into creating the VIX Index.
btw, The current comments from the Fear & Greed Index this morning reads:
"During the last five trading days, volume in put options has lagged volume in call options by 51.44% as investors make bullish bets in their portfolios. This is among the lowest levels of put buying seen during the last two years, indicating extreme greed on the part of investors."
However, again I could be wrong in my assumptions.
Best regards,
Ray
Hi Tf,
One other thing.
I am sure you know that all American options are cleared by the Options Clearing Corporation (OCC) of the CBOE. It is their job to make sure that every buyer has a seller and every seller has a buyer.
On the CBOE website it says the following:
"What is the OCC?
The Options Clearing Corporation is the sole issuer of all options listed at the CBOE and other U.S. options exchanges, and is the entity through which all CBOE option transactions are ultimately cleared. As the issuer of all options, OCC essentially takes the opposite side of every option traded. Because OCC basically becomes the buyer for every seller and the seller for every buyer, it allows options traders to buy and sell in a secondary market without having to find the original opposite party.
The OCC substantially reduces the credit risk aspect of trading options, as the OCC requires that every buyer and every seller have a clearing member and that both sides of the transaction are matched. It also has the authority to make margin calls on firms during the trading day.
http://www.cboe.com/LearnCenter/Concepts/Beyond/marketplace.aspx
I could be wrong but my understanding is that if I want to buy a Call option and there is no seller on the other side at that moment that the OCC will essentially see that I get to purchase that call through one of their clearing members (market makers). It does this so that "it allows options traders to buy and sell in a secondary market without having to find the original opposite party."
It would appear that the equity market does not have a guarantee such as this other than some market makers for the very large big board stocks.
So, the way I read it is that if there are more people looking to buy than there are people willing to sell, then the OCC takes the opposite side of the trade and makes sure they can make a purchase at the prevailing price.
Again, this is only my understanding and I could be wrong.
Regards,
Ray
Hi Tf,
As you know, I did not create this index and thus, I am no expert in this. What this index is measuring is the amount of "Put Buying" compared to "Call Buying". It says that investors buying Calls are much greater than those who are buying Puts....in fact, the discrepancy between the two is the greatest in two years. That is how the creators of the index measure market sentiment.
Of course, for someone wanting to buy a Call there has to be someone on the other side of the trade willing to write the Call. That does not however negate the fact that a lot more investors want to buy Calls now than to buy Puts.
I am sure that when investors start getting bearish the amount of investors requesting Puts is going to increase. The fact is that right now they want more Calls in their portfolios than Puts.
I didn't create the Index....just reported on what it said.
"During the last five trading days, volume in put options has lagged volume in call options by 50.80% as investors make bullish bets in their portfolios. This is among the lowest levels of put buying seen during the last two years, indicating extreme greed on the part of investors."
Those are not my comments...those comments are from the people who created the index. I just copied them.
Regards,
Ray
Re: Fear & Greed Index
My suggestion is to be very careful about entering a new position or adding to existing positions unless directed by AIM. The Index is about as high as I can remember with a 94 reading.
http://money.cnn.com/data/fear-and-greed/?iid=EL
In the Put-Call Option portion of the Index it says,
"During the last five trading days, volume in put options has lagged volume in call options by 50.80% as investors make bullish bets in their portfolios. This is among the lowest levels of put buying seen during the last two years, indicating extreme greed on the part of investors."
Thought I would pass this along for whatever it might be worth.
Regards,
Ray
Hi Conrad,
"Could anybody give me a hint on the dates Ocroft disclosed his Methotd to the AIM Board?"
I did a search and found what appears to be Ocroft's initial post. It is Post #31565. It was posted March 22, 2010.
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=48120947
I have read the post several times and I think I got an understanding of what he was trying to say. It appears he would synthetically follow a stock which was declining in price. It would appear he would synthetically apply the AIM formula with the declining stock price until the Portfolio Control ceased rising. At that point he would make his initial purchase. However I could be wrong on that point.
In his message he says,
"I just discovered this Aim user site. i would like to share this observation with the users of AIM.
I have observed that in the AIM universe,on the buy side, it is better to buy the stock; not as the price is falling,but when the portfolio control stops changing or rising.
They are an inverse process. When the PC is changing or rising, the price is falling.
When the PC stops changing or rising, the has stop falling.
AT the point the PC stops changing, you enter and buy the same amount that the by the book AIMER bought.
I would say 90 percent of the time , you always will purchase more shares.
The best part is that you are not in the way of a falling market."
Conrad, I hope this helps you find what you were looking for.
Regards,
Ray
Hi Bob,
Thanks. That helps a lot.
I remember reading some of those posts and, at that time, had a hard time grasping what he was trying to say. In his most recent response to Conrad he said he did not do charts. So I was trying to understand how he decided when it was time to make a purchase. That is why I phrased E:) in the manner in which I did.
Again, thanks. I appreciate it.
Regards,
Ray
Hi Adam,
Thanks for your comments.
As you say, the Dead Cat bounce can give a person a head fake and cause a person to make a purchase before the stock heads down into oblivion.
Personally I prefer ETFs of all shapes and sizes....sector, broad based, single foreign country or whatever. That way I don't have to concern myself with missed earnings reports, dividend cuts, company executive malfeasance, etc.
In his last book Mr. Lichello spoke of favoring the new index funds (new when he was alive). He said that since they did not have a portfolio manager going to cash the new index funds would have a lot more volatility or "juice" as he called it. Generate more buys and sells than a managed fund. A lot has changed since he passed away.
Take care,
Ray
Hi Ocroft,
Please let me know if I have a correct understanding of your Buy method of using AIM.
A:) A stock you own goes into a downtrend and signals a Buy using your chosen settings for SAFE and Minimum Transactions.
B:) You do not Buy any shares at this time but continue to monitor what is happening to your stock.
C:) The stock continues its downward trend and signals another Buy....now it has signaled Consecutive Buys.
D:) Again, you do not Buy any shares, but continue to monitor the stock and make notes on the number of shares your cumulative Consecutive Buy signals have indicated you should have purchased.
E:) Now the stock turns around and begins a new uptrend. Eventually it signals a Sell. At this point you now Buy all the shares you delayed purchasing while the stock was in its downtrend.
Since it appears to me that you do not use any Charts or Technical Analysis in your investing it would appear that E:) above is your method for choosing when to make your AIM purchase of shares.
It seems to me that it is almost like using some kind of Vealie, but on Buys instead of Sells.
My conclusion is that this would prevent you from buying some cheaper shares in the event that only one Buy was indicated and the stock turns around and begins a new uptrend. On the other hand, if you purchased a Deep Diver the only actual real money you would have committed is your Initial Purchase. Consecutive Buys are excluded in your method.
Bottom line for me is that if I began to use a method such as I described above I would use some small SAFE and Minimum Transaction settings which would mimic a MACRO AIM type investing for my AIM Hold Zone. Probably would not use a SAFE on the Sell side. Would not use this method for ETFs or Closed or Open End mutual funds since they would never go to zero, but only use this method for individual stocks.
If I am wrong in my understanding please let me know.
Thanks,
Ray
Hi Tom,
One reason I like to look at the Put to Call Option ratio is that "supposedly" the more sophisticated and experienced investors buy options. The fact that these particular investors are overly bullish at the moment seems to be a contrarian indicator in my way of thinking. We all know that the general retail investors become overly bullish at market tops. However, when the more experienced investors also become overly bullish it seems to me that caution ought to be taken with respect to all transactions.
Best regards,
Ray
Re: Fear & Greed Index
For what it is worth.
For those who are thinking about starting new AIM positions or add new money to existing positions....the Fear & Greed Index is now showing "Extreme Greed". You might want to be cautious in committing new money to stocks.
The one indicator which is most worrisome to me is the Put-Call Options investor sentiment indicator. It shows that for the last 5 days Put buying volume has lagged Call buying volume by 49.88%. This is the lowest in 2 years indicating Extreme Greed among investors.
http://money.cnn.com/data/fear-and-greed/?iid=EL
Best regards,
Ray
Thanks Clive for your thoughts. I really appreciate them.
This past weekend I read a little about volatility and XIV-VXX. Decided to look at some charts to see how they did over the long run. It would appear from the charts I looked at that XIV was created sometime around the end of 2010....not much history going for it. It had a very large decline in August-September 2011 with that large market correction. Since it does not appear to have been around for the 2007-2009 bear market I thought I would see if anyone had AIM'd it and how they fared with an AIM program using XIV.
Again, thanks for your thoughts.
Best regards,
Ray
Has anyone tried AIMing XIV? This ETN seems to have some very good volatility with a long term upward bias from the charts I've seen.
Thanks,
Ray
Hi Clive,
Understand what you say about Direxion and others having to put out those warnings. They should put those out for unsophisticated investors like yours truly. I think there is a lot of misunderstanding about these leveraged ETFs.
What I have personally found is that initially they track the underlying by the amount they are leveraged...either 200% or 300%. However, when the market gets into what is called either congestion or a trading range....goes back and forth....up one day and down the next....then their tracking to the underlying sort of gets skewed and can't be depended upon. At least that has been my personal experience. As a result, whenever I use these...which is rare these days....I sell them in a hurry after they show enough profit (which isn't much) to satisfy me. Mostly I just avoid using them altogether these days.
Scaling a leveraged long position to 1X makes sense. I haven't tried it that way. Would need to give that more study and more thought.
Best regards,
Ray
Hello Bob,
Not sure how to post "quotes" here, but I totally agree with your last paragraph.
I have had a "small" amount of success in the past using inverse ETFs in this fashion. However, as I said in my previous post, I am an extremely conservative investor and only used a small amount of my Cash....maybe 10-20%....for this purpose. But I was extremely nervous doing it and sold out immediately after recording some small gains.
Direxion says these should be used only by "sophisticated" investors and I agree. The values are very volatile in their daily movements. I don't sit in front of a monitor all day long. In my opinion, only investors who watch the market all day long should put much of their money into these leveraged inverse ETFs, so they can act when they think it is time to do so. Most AIM investors I know aren't so vigilant.
Best regards,
Ray
Hi Bob,
I was only responding to Tf's post since no one else was doing so. I thought he deserved one in any event. I was probably not the right person to respond to his post. Besides if you look at my follow up post to Tf you will see that I told him I missed his point.
Sorry if I mislead anyone.
You know an awful lot more than I do on this subject so I will let him defer to you.
I was only expressing my opinion about using leveraged inverse ETFs as "long term" investments instead of Cash. With an AIM money management investment strategy I want to be able to depend on a certain amount of dollars in my "cash account" when I need it to make additional stock or fund purchases. I am a very conservative investor and I like things I can depend upon. At the moment Cash is one of those things. Again, I was only expressing my opinion for what its worth.
As far as using "percentages" in my examples. I meant those in a general term to any instrument whose value fluctuates, not just with leveraged inverse ETFs. I am sure most readers understand that. The reason I even used those examples is because there were used by Direxion Funds in some old prospectuses. They used those percentages to show how "Daily" pricing could effect one's expectations. I used to have some of those old prospectuses lying around in the office in my home, but I cleaned them out a couple of years ago. There were a number of "warnings" in those prospectuses.
Also, I recall that one of those warning on its website said these leveraged ETFs were to be used only "sophisticated" investors. I am surely not in that category. Again, I probably should not have responded to Tf.
Below is a link to a page on Direxion's website. It puts SPXS and other leveraged long and inverse ETFs into a category it describes as "SHORT TERM TRADING". IMO, even Direxion does not consider these leveraged ETFs to be used for "long-term investing" ...only for "short-term trading".
http://www.direxionfunds.com/regulatory-documents
With respect to my example using SLW and DSLV. It was only an example I used to show that he might have been better off doing this a year ago than try to and do it now since it seems that silver has lost a lot of value and has been down for several months now.
I guess these were my points to Tf. As I said I probably was not the right person to respond to him.
Best regards,
Ray
Hi Tf,
Guess I missed the point of your post. Sorry about that.
Regards,
Ray
Hi Tf,
Have been thinking about how to answer this so that it makes sense. I think I will answer the last question first.
DSLV is a 3X leveraged inverse etf. I am not familiar with this fund, however I am familiar with the Direxion family of leveraged etfs. The prospectus for the Direxion family of leveraged etfs clearly state that these types of etfs are only for "short-term" investments....not to be used as long-term investments.
The problem is the daily "compounding" problem. If a fund drops 10% in value then it requires an 11% increase in value just to get back to breakeven. A 25% value decline requires a 33% increase to get back to breakeven....etc.
With that in mind using any sort of inverse fund as a cash substitute for any lengthy period of time really creates a problem that is hard to correct. Suppose for example someone had bought a 3X leveraged inverse etf for the S&P 500...SPXS...on January 2nd of this year for a cash substitute.
This etf had a 5:1 reverse stock split at the end of August. So, its adjusted close at the first of the year was $78.20. Yesterday it closed at $36.77. This is a decline of $41.43 per share, or -52.9%. However, it will need an increase of +112.67% just to get back to breakeven.
Assume an investor who had bought this etf at the beginning of this year did so because he thought the market was overvalued and oversold. Assume that the market currently begins an extended correction or decline....goes into a bear market. The investor was correct in his assumption, but terribly wrong in his timing. Not only will his current investments go down in value, but the cash he had set aside to make purchases when his downside targets are hit is only a fraction of what it had previously been.
So, IMO, inverse funds...leveraged or not....are terrible holdings as a long-term cash substitute.
On the other hand, they can be great a short-term holding, which is their purpose. They can be really good investments to use during corrections or bear market declines....just like buying Put options. IMO, they should also had a "finite" life just like an option. IMO, the investor treat them just like a Put option which expires in a month or so. The investor should always be thinking about selling an inverse fund immediately after his profit target is met. If the market turns against the inverse fund or etf and starts gaining then it should be sold immediately. As we know, when a market goes into a serious bear market decline it usually does so in a violent quick manner. Unlike a bull market which takes a much longer time period to develop.
Getting back to SLW. Looking at a chart of SLW and how far it has declined there is no way I would now hedge it with an inverse fund. The time to do that was about a year ago when SLW was around $40 a share....now it is around $19.40. At the time SLW was selling for around $40 a share DSLV was then selling for approximately $20 a share. DSLV has since tripled in value and currently selling for almost $60 a share, while SLW has lost about 50% of its value. If it were me I would wait until SLW has some extended gains before I would consider hedging it with DSLV.
These are just my opinions.
Best regards,
Ray
Sorry. I don't have anything left on it. I just manually updated my worksheet on a daily basis....the worksheet was the only data I had. When it appeared that it would not be of any real use to me in setting up any AIM programs I just got rid of it.
Best regards,
Ray
Welcome to the board.
Thank you for your interest.
I no longer track this index for a couple of reasons.
One reason is because of its volatility. In my opinion, it changes direction too quickly to be useful as a long term index for use with AIM directed type programs. AIM programs are more closely aligned with buy-and-hold investing than with short term trading. I find that it is more useful for very short term trading, such as with options which are close to their expiration dates.
Then in September my wife and I traveled for about 3 weeks. Got so far behind in my tracking that my worksheet became worthless. So I deleted my worksheet.
IMO, if an investor or trader is interested in doing some short term swing trading then they might find some value in viewing its current reading before making a purchase. Otherwise it serves no real purpose in AIM type investing.
Best regards,
Ray
Hi Steve,
In real life it is not nearly as laborious as I described in my post.
I already know which PC amounts will require how many $ to purchase with my first indicated Buy after the program is set up.
All I have to do is just divide the PC with the current stock price and see how many total shares it will take to support the PC at that price.
Then it is just a couple or three more entries on my calculator and I am good to go with respect to making my initial purchase to set up the program.
Takes about 30 seconds to a minute in real life.
Best regards,
Ray
Hi Steve,
Looks like we approach it the same way....only I do it the hard way.
Best regards,
Ray