Tuesday, December 23, 2008

State of the Market - 12/23/08

As expected, we had another low-volume, boring day today on Wall Street, as the holiday trading season appears to be upon us in full force. Stocks were choppy but higher early on in the session, but started falling around 11:00 and continued to do so until lunchtime. From there, stocks basically went sideways with a slight downward bias. There was no late day bounce today and even though we closed lower, not much of substance happened in my opinion.

Technically, I am still looking at 850 on the S&P as a key number as that will mean a lower low has taken place. I would also watch around 1500 on the Nasdaq, although it has to get down near 1478 to make a lower low. Right now, it kind of looks like we are setting up a situation like August (I mentioned this possibility in the video this weekend) where we just move sideways for a while around the 50 day moving average before breaking down in earnest. Tomorrow is going to be extremely slow and Friday will likely be the same. I could see that happening (more sideways movement) through next week. If for some reason volume comes into play on a breakdown, that will be important.

I did nothing today except set my stops at the open and turn off my quote screen. I was stopped out of my BDC short at $19.22, which I kind of expected. It still sucked however because it reversed lower right after that and I would have a gain right now. It ended up giving me a 4.85% loss, which is much higher than I like to take.

On a different note, sometimes you get a blessing when trading and you don't even realize it. I was very close to going into SDS and QID yesterday afternoon but decided not to. I would have likely been stopped out anyway on the late bounce, but if I wasn't, I would have had a heart attack this morning. I can't believe these inverse ETFs. Look at SMN. Perhaps people holding these were aware of what was going to happen, but I am sure a bunch were not (I wouldn't have been). I don't know how they play out with these redemptions - I don't know what to think about them. I wonder aloud if these things are here to stay or if eventually they are going to self-destruct. Just a thought. I know I would probably have been better off if I stayed completely away from them.

Tomorrow will be a very short and likely boring session, so I don't know if I will be back with a commentary or not. If not, I hope all the readers of this blog have a great Christmas holiday and can enjoy the next few days with friends and family away from this market. After the holiday, I'll try to be back with a few posts or videos before the baby comes on December 30. Take care and God bless. Merry Christmas!


seeer said...

About the Ultra ETFs:

Anonymous said...

what a sucker punch to force to pay those taxes on inverse ultra ETFs

Anonymous said...

Mac, while I agree most people probably did not see the distributions coming (me included) since these are really designed for trading, I do not see the big deal ... i.e., you get the price differential as a short-term gain the same way you get other short term gains from trading these ETFs.

The other thing I wanted to mention was that I made a killing in SDS this year. About $325K in short term cap gains, half of it from trading SDS ... incidently, I have had a fair amount of difficulty with SSO, the sister fund.

Merry X-mas,


Anonymous said...

...nevermind on my comment on the distributions ... I see I made a mistake in the way it works tax-wise. It would suck if you just bought it yesterday and had to pay tax on that distribution.


Mac said...

I still don't quite understand what happens to the people that bought before yesterday. Do they get that money back at some point that they lost on these gap-downs?

I have to look at all my trades for the year, but I am guessing I am probably even to slightly lower on the inverse and ultra ETFs. I have had some very nice gains in these, but also have had a lot of small losses that overall probably cancel the gains out.

Anonymous said...

My understanding of the way the distributions work is that you DO get the difference (about $11/per share for SDS) paid to you in cash by the end of this calendar year, but you actually then have to pay short-term cap gains on that!

So, imagine you bought at the close the day before distributions and sold at the open for what otherwise would be a wash, you get taxed as though you had a ~15% taxable gain!

When I trade these, I usually buy them in $1MM lots ... so, had I owned one of these suckers yesterday, I would have been in for a HUGE short-term cap gain (and remember, short-term cap gains are taxed as ordinary income, not the 15% dividend or long-term cap gain rate!).

Talk about a trap for the unweary!


Anthony said...

these inverse ETFs ruined me. i started trading in July 2007 with a major short position on DIA and IWR. I levered my account to the max (3x). Unfortunately, i exited my positions in October looking for a better entry point as the mkt kept bouncing higher. I got out breakeven on these shorts then the mkt dropped big time, shortly after i exited the position i was patiently in July - Oct. then i met the inverse 2x ETFs and was like i have to make this money back. Well whoever was on the other side of me made a killing as i got washed out of these things many many times.