3SOF

David Randolph · March 05, 2007, 05:46:18 AM

This is a general market bearish bet, in tandem with the article wrote last week: Correction or Bear Market?

The general market will go down, but small cap growth companies will be the ones that will fall the most in my opinion. SKK is a financial product that gives us the inverse of the Russel 2000 Growth Index ($RUT) with two times leverage (I dislike leverage, but this is an index that doesn't move all that much, since it is very diversified being composed by 2,000 different stocks, so not all that much risk in leverage here).

$RUT rose 141% since the bottom in 2003, an average annual gain of 25%. Now I see the index going down 30 - 40% in the current bear market, so I won't care too much about the short term volatility.

The trading plan is:

Buy SKK, 6.66% of capital as always.

(the product is still quite new - trading for just 7 days - so liquidity is low, so beware of the bid/ask spread and bad fills)

lancefur · March 05, 2007, 10:53:44 AM

Was there a fee to get into this? Seems like I bought at open and didn't get a good price or something. I bought in at 81.58 but you have it at 80.58 as your entry. $1 fee per share or something?

nullzero · March 05, 2007, 12:35:50 PM

Just didnt put a limit order in and wait. SKK still has relatively low volume so its spread is more.

David Randolph · March 05, 2007, 12:44:19 PM

Quote from: lancefur on March 05, 2007, 10:53:44 AM
Was there a fee to get into this? Seems like I bought at open and didn't get a good price or something. I bought in at 81.58 but you have it at 80.58 as your entry. $1 fee per share or something?

I started selling short positions first as I knew SKK would open with a gap up and a big bid/ask spread. When I went to buy it, it was at $80.58. I got a good fill on SKK, but a bad fill on the shorts, since they rebounded from the open ... anyway, I wouldn't care too much about $1 on a $80 plus ETF, I expect that to be meaningless in a couple of months time

David Randolph · March 06, 2007, 05:53:33 AM

SKK had its biggest one day volume ever (in its 8 day history

). I feel pleased about owning this product, since it goes up as the Russel 2000 growth index goes down.

If I'm bearish on the general market as you know I am, I'm even more bearish on small cap growth stocks, since they're priced for strong growth going forward, and I don't expect anything like that over the next couple of years.

The downside potential is higher in small caps than in large caps, because they don't have the same financial resources and they're trading at higher valuation multiples.

The SKK closed at an all time high yesterday, I know it will pullback at the open, but I see that as a temporary thing due to Hank Paulson comments in China, saying he doesn't expect the housing troubles to deepen more or spill over to consumer sentiment.

I say he was expected to say something like that

I'll continue holding SKK with strong hands.

berloga · March 06, 2007, 08:52:38 AM

David,

Do you think the big shots are simply manipulating the market by releasing news like this one on Market Watch:

"LONDON (MarketWatch) -- U.S. stock market futures were pointing to a recovery on Tuesday, buoyed by a rise in overseas markets and the dollar as global investors expressed hope that a wide variety of worries have finally been priced in."

I don't understand how "major worries" could have been "priced in" in merely a matter of days. Also, they mentioned brother Greenspan saying it is only a 1/3 chance of economic recession. I would love to see his math arriving at this fraction, but nevertheless, since most people can figure 1/3<0.5, they see no sense in worrying.

I would like to see your comments on the news feeds and help us decipher the intent and the meaning.

Thank you!
Berloga

ygtrdr · March 06, 2007, 10:00:26 AM

Managed to grab some shares on this mornings pullback.

lancefur · March 07, 2007, 06:39:43 AM

Quote from: ygtrdr on March 06, 2007, 10:00:26 AM
Managed to grab some shares on this mornings pullback.

I thought about the same but then I remember one of David's cardinal rule's of risk management and that is to never buy additional shares of an already existing position. Months ago I never understood that until now where it is abundantly clear that you risk more and therefore can have weaker hands on a position and let emotions run your decisions.

I do wish you well and that you average better than I in this position but I need to find something else in these ultra pro shares.

David Randolph · March 07, 2007, 06:57:52 AM

Quote from: lancefur on March 07, 2007, 06:39:43 AM
Quote from: ygtrdr on March 06, 2007, 10:00:26 AM
Managed to grab some shares on this mornings pullback.

I thought about the same but then I remember one of David's cardinal rule's of risk management and that is to never buy additional shares of an already existing position. Months ago I never understood that until now where it is abundantly clear that you risk more and therefore can have weaker hands on a position and let emotions run your decisions.

I do wish you well and that you average better than I in this position but I need to find something else in these ultra pro shares.

That is a very important money management rule lancefur, and I'm glad you've kept it on record. But I guess ygtrdr's entry was his first on SKK, I don't think he/she is averaging down the price.

As for SKK, it went down yesterday as it should, since the market rallied. I'm losing 2.42% on the trade. I consider yesterday's rally as an oversold short term bounce, but the short term trend remains bearish (I believe the medium term trend will also be bearish in a couple of weeks time due to my general macroeconomic assessment).

I can be wrong though. It wouldn't be the first time, or the last. For now the market still didn't prove me wrong, so I'll keep holding my bearish positions.

I wouldn't get out of them with a 5% profit and I won't get out of them with a 5% loss either. I'm on the path to medium/long term trading.

I'll continue holding SKK, which represents the inverse of the Russel 2000 growth index with two times leverage.

lancefur · March 07, 2007, 07:17:56 AM

Quote from: David Randolph on March 07, 2007, 06:57:52 AM

That is a very important money management rule lancefur, and I'm glad you've kept it on record. But I guess ygtrdr's entry was his first on SKK, I don't think he/she is averaging down the price.

Sorry you are right, David. I just read the post wrong. My apologies to you ygtrdr.

ygtrdr · March 07, 2007, 09:32:47 AM

No apologies necessary. Just a simple misunderstanding. Yes, it was my first entry into SKK. I appreciate the warning about averaging down! It is something I myself am guilty of doing in the past and trying to stop that practice now. Good trading!

David Randolph · March 08, 2007, 06:03:54 AM

Quote from: ygtrdr on March 07, 2007, 09:32:47 AM
No apologies necessary. Just a simple misunderstanding. Yes, it was my first entry into SKK. I appreciate the warning about averaging down! It is something I myself am guilty of doing in the past and trying to stop that practice now. Good trading!

That's good ygtrdr

Cutting losses and letting the profits run is a valuable lesson. Not averaging down or up is another valuable lesson in terms of money management. Unfortunately there are so many more lessons to learn ... but for as long as we're here and working together I believe we'll learn most of them and become quite successful investors.

I'm more bearish on Small Cap Growth stocks than on the general market. Large caps have perhaps better opportunities overseas (in terms of revenues), and are trading with cheaper multiples.

Small cap growth is an area that I see going down in 2007, irrespective of the Dow Jones or S&P 500 performance. Say the S&P500 ends the year flat to a 5% gain. I say small cap growth will fall 5 - 10%.

I'll continue holding SKK, a financial derivative that gives us an inverse performance of the Russel 2000 small cap growth index, with two times leverage.

David Randolph · March 09, 2007, 06:15:57 AM

I've decided to put all my bearish bets on the market dependent on the SPY and the midpoint of that serious red candle, standing at $141.69. The way I see it and with the doubts I'm having this is the prudent way to play the market now.

If the SPY is set to close below $141.69, I'll continue holding SKK. If not, if the market rises and is about to close above that level, I'll sell SKK.

David Randolph · March 12, 2007, 04:59:08 AM

There's nothing to change to my previous trading plan for SKK:

QuoteI've decided to put all my bearish bets on the market dependent on the SPY and the midpoint of that serious red candle, standing at $141.69. The way I see it and with the doubts I'm having this is the prudent way to play the market now.

If the SPY is set to close below $141.69, I'll continue holding SKK. If not, if the market rises and is about to close above that level, I'll sell SKK.

David Randolph · March 13, 2007, 09:14:16 AM

I'm bearish on small caps in general, as a whole, however there's still great value outthere on specific stories. This SKK long, being a bearish bet on small cap growth stocks in general, is attached to the best general market gauge, the S&P500, or in this case, its tracking stock, the SPY.

I'll continue holding SKK for as long as the SPY is set to close below $141.69.

News:

SKK