Sometimes I get really great questions via email and I like posting them here once in awhile, along with my answer. Note that my opinion may or may not be correct but that's how I think.
Question:
hi beanie i just wanted to hear a little more in depth on your hate of the ultra ETF's. I mean as an investor i understand cause they are not IMO supposed to be used to invest in. But as a daytrader can not see why you could not like them, for example take buying/shorting the SPY and buying either SDS/SSO. With the SPY you buy $100,000 worth for a day trade and sell out for a 2% gain same day, $2,000 gain Or you buy $50,000 worth of SSO for a daytrade and sell for 4%(double the gain of the SPY), $2,000 gain. Now to me it looks like an advantage to trade the SSO/SDS on the fact you can get the same results but with half the investment leaving the other half put in some other investment (gold,bond,cd's.etc...). I am pretty much trying to get your point of view on it cause you seem to highly dislike them. To me it seems like it allows you to double up with someone else's money technically, like trading on margin except not actually borrowing money. I also hear the case of oh this is how the market is so low cause shorts/ultrashort etf's, but doesn't it work both ways if we were in a bull market would it not then aid to the bulls (except no one would be complaining). If you haven't already tryed it (come to the dark side, lol) use my example above whatever you trade the SPY with cut it in half and trade the SSO/SDS (you can even put the charts right next to each other and just pretend your trading the SPY). I look forward to hearing you side cause i view you as a very intelligent/successful trader, plus i want to see if i am viewing this the wrong way.
Answer:
Doug Kass explained it quite succintly well in his recent article. In an extremely severe bear market that we're in right now, the bears have major advantage when they use these ultrashorts. These things drive the market down much faster and relentlessly. Every time we rally, the bears slam it without huge sums of money via the ultrashorts. Investors go in deep despair when they see the market like this. This is bad for the market, investors, and it's bad for many companies that depend on the stock market for loans....these in turn effect other companies that they buy from, because they don't have the capital or can't raise the capital to buy products from their partner companies. A bull market works very differently because a bull market, no matter how bullish it is, benefits lots of companies because they have access to capital. A depression-like bear market can destroy the entire US financial system while a bull market doesn't. Needless to say, that is a very bad thing. It is true that depressions always come from excessive bull markets, but we do not need these ultrashorts to make things worst. You know, much of the stock market is about investor emotions. When investors keep seeing this kind of market destruction done by bears (using these ultrashort etfs gives bears great advantage at times like these), they grow distrusting and fearful and eventually sell everything and never return to the market again.....for a very very long time. Companies will get hurt badly and many will file for bankruptcy. People will lose their jobs and a death spiral starts. Ultrashort etfs, in my opinion, can take us to a great depression and an extended one at that. All the bears have to do is keep on slamming the market with these etfs, and that's what they've been doing.
It is true the SSO/SDS gives a higher return due to leverage. But I assure you, I make more in absolute percentage-wise than those who trade the SSO/SDS because of money management issues. You see, traders who trade leveraged instruments like the SSO can only put a small percentage of their portfolio into these intruments (same goes with options and futures and forex); otherwise they run the risk of ruin when they put too much money into these things. On the other hand, when i trade the SPY, if i'm certain of the move, sometimes I put 50-75% or more into the trades and it would not be consider extremely risky because the SPY is usually a slow mover and gives ample time to get out when i'm wrong. So that is the difference, and that is why I say these intruments are not necessary. Money management issues level the playing field on SPY against the SSO.
Hope I explained it well enough,
Beanie
Question:
hi beanie i just wanted to hear a little more in depth on your hate of the ultra ETF's. I mean as an investor i understand cause they are not IMO supposed to be used to invest in. But as a daytrader can not see why you could not like them, for example take buying/shorting the SPY and buying either SDS/SSO. With the SPY you buy $100,000 worth for a day trade and sell out for a 2% gain same day, $2,000 gain Or you buy $50,000 worth of SSO for a daytrade and sell for 4%(double the gain of the SPY), $2,000 gain. Now to me it looks like an advantage to trade the SSO/SDS on the fact you can get the same results but with half the investment leaving the other half put in some other investment (gold,bond,cd's.etc...). I am pretty much trying to get your point of view on it cause you seem to highly dislike them. To me it seems like it allows you to double up with someone else's money technically, like trading on margin except not actually borrowing money. I also hear the case of oh this is how the market is so low cause shorts/ultrashort etf's, but doesn't it work both ways if we were in a bull market would it not then aid to the bulls (except no one would be complaining). If you haven't already tryed it (come to the dark side, lol) use my example above whatever you trade the SPY with cut it in half and trade the SSO/SDS (you can even put the charts right next to each other and just pretend your trading the SPY). I look forward to hearing you side cause i view you as a very intelligent/successful trader, plus i want to see if i am viewing this the wrong way.
Answer:
Doug Kass explained it quite succintly well in his recent article. In an extremely severe bear market that we're in right now, the bears have major advantage when they use these ultrashorts. These things drive the market down much faster and relentlessly. Every time we rally, the bears slam it without huge sums of money via the ultrashorts. Investors go in deep despair when they see the market like this. This is bad for the market, investors, and it's bad for many companies that depend on the stock market for loans....these in turn effect other companies that they buy from, because they don't have the capital or can't raise the capital to buy products from their partner companies. A bull market works very differently because a bull market, no matter how bullish it is, benefits lots of companies because they have access to capital. A depression-like bear market can destroy the entire US financial system while a bull market doesn't. Needless to say, that is a very bad thing. It is true that depressions always come from excessive bull markets, but we do not need these ultrashorts to make things worst. You know, much of the stock market is about investor emotions. When investors keep seeing this kind of market destruction done by bears (using these ultrashort etfs gives bears great advantage at times like these), they grow distrusting and fearful and eventually sell everything and never return to the market again.....for a very very long time. Companies will get hurt badly and many will file for bankruptcy. People will lose their jobs and a death spiral starts. Ultrashort etfs, in my opinion, can take us to a great depression and an extended one at that. All the bears have to do is keep on slamming the market with these etfs, and that's what they've been doing.
It is true the SSO/SDS gives a higher return due to leverage. But I assure you, I make more in absolute percentage-wise than those who trade the SSO/SDS because of money management issues. You see, traders who trade leveraged instruments like the SSO can only put a small percentage of their portfolio into these intruments (same goes with options and futures and forex); otherwise they run the risk of ruin when they put too much money into these things. On the other hand, when i trade the SPY, if i'm certain of the move, sometimes I put 50-75% or more into the trades and it would not be consider extremely risky because the SPY is usually a slow mover and gives ample time to get out when i'm wrong. So that is the difference, and that is why I say these intruments are not necessary. Money management issues level the playing field on SPY against the SSO.
Hope I explained it well enough,
Beanie
