Friday, April 12, 2024

Who Said Pigs Can’t Fly?

Flying-Pigs

I mentioned a few days ago that I expected the market to do one of two things... either rally up just shy of the double top at 115.14 spy, and then tank, or break above it to lure in retail traders to short at the double top.  It looks like we have the second scenario, as the market went through the previous high of 115.14 spy.

Since it is just barely above it now, I do expect a little higher push to squeeze out those new shorts at 115.14 spy.  I said previously that we could add .50 cents to 1.00 above the high, and that's still in play.  Think like the big institutions would.  Why would they tank the market now, and let all the retail traders make money with them?  They wouldn't, as they want to take the retail traders' money from them.

So how would you do that if you were a big institution?  I'd push the market up to the next major resistance level, somewhere between 116.10 and 116.35... which would have all those retail traders who went short at 115.14, bailing out on their shorts with a loss.  Many will even switch sides and go long... at which point they will sell it off hard.

So, unless some really bad and unexpected news comes out tomorrow, I hate to say it, but these pigs could fly for another day.  It's really a frustrating market, controlled a 100% by the government.  I'm sure they have supercomputers scanning the internet blogs, and reading the bullish or bearish sentiment.  They have the money to keep the market up, and all the inside information.  I only expect it to get tougher over the years.

I don't know what will be the reason to sell off the market, but it will probably come when you least expect it... like overnight.  Don't know how far it will go down either, but I'd expect that gap at 113 area to be the first stop.  But, for tomorrow, I expect more of same... more pigs flying.

Red

No Friday Post. The Weekend Post should be up by late Sunday night.

For your entertainment, and to just mess with your head some more (as if this crazy market hasn't already done that), here is cool trick...

If you take a look at the following picture, let me tell you .... it is not animated. Your eyes are making it move.   To test this, stare at one spot for a couple seconds and everything will stop moving.   Or look at the black center of each circle and it will stop moving.   But move your eyes to the next black center and the previous will move after you take your eyes away from it Weird ?

swirling circles

Now go get drunk, and don't worry about the stock market for a day or two...  (or smoke some wacky weed if that's your thing.  Just enjoy life for a little while).

Red
Author: Red

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St.Xinon
St.Xinon
14 years ago

I do accept that failure in TA patterns is best way to cause a squeeze (long or short).

but there is a danger of a stampede event that can happen in case this plan is tipped too much on one side.

Right now bear have nothing on their hands.
Breaking of bond bubble is a great fundamental point bulls are holding. and no one has a IOTA of a clue how tittered bond investors may react to bond bubble bust.

Imagine muni bubble busting.
whom government saves stocks or munis ?
of course munis.

Red Dragon Leo
14 years ago
Reply to  St.Xinon

They are clearly holding this market up for a reason. What the reason is… is unknown? It could be Obama's health care plan? It's really hard to predict why, or what is the reason behind it… but it's very dangerous to not allow a correction from time to time.

Eventually, this market is going to crash hard. And no amount of government manipulation with the dollar is going to save it. Too many bubble's… something will give.

SC
SC
14 years ago
Reply to  Red Dragon Leo

Mid term election.

Red Dragon Leo
14 years ago
Reply to  SC

Very possible… That's in November of this year, isn't it? Just keep it up/sideway's until it's over… then pull the plug!

SC
SC
14 years ago
Reply to  Red Dragon Leo

They are trying to prevent or reverse this…

http://consumermetricsinstitute.com/index.html

Red Dragon Leo
14 years ago
Reply to  SC

I wonder what their odds of success are? Slim or None, I'd say… Delay? Yes… Stop? NO…

SC
SC
14 years ago
Reply to  Red Dragon Leo

Yep. The term you are looking for is “kicking the can further down the road”.

http://www.hussman.net/weeklyMarketComment.html

John Hussman is one of the brightest mind in finance. I came to learn about his work back when he was still a professor at U of Michigan. You will find his analysis illuminating.

gcocks83
gcocks83
14 years ago
Reply to  SC

Thanks SC have not seen these before.

SC
SC
14 years ago
Reply to  gcocks83

It is new work.

moon
moon
14 years ago

keep up the hard work red. This is unsustainable –

http://market-ticker.org/archives/2068-New-Fed-

Going to the Fed site and if you look at money flows it reeks of deleveraging and no recovery.

http://www.federalreserve.gov/releases/z1/Current/

sundancer390
sundancer390
14 years ago

for those with the mindset that the move from March 9, 09 has been a correction then the place for it to terminate is near

$SPX monthly- $SPX is currently in a co-relational move to 3/03' dancing with max contain
http://www.flickr.com/photos/47091634@N04/44264

$RUT- is points away from it's 679.75 level, the TA enthusiasts will see a massive H&S
http://www.flickr.com/photos/47091634@N04/44271

the chart that people should have their eyes on is the $TNX weekly, moving day is coming soon
http://www.flickr.com/photos/47091634@N04/44264
whether the $TNX breaks up or down, it's probably not going to generate a positive reaction in equities

monicadern
monicadern
14 years ago
Reply to  sundancer390

Was 678.90 high enough on the $rut? Shoot!

sundancer390
sundancer390
14 years ago
Reply to  monicadern

if you're trading a backtest, then top-ticking the trade doesn't make a difference if the $RUT has 300 points downside

monicadern
monicadern
14 years ago
Reply to  sundancer390

And that is why I have been holding for months 🙁 Hopefully one day I will make my money back 🙂

Earl of
Earl of
14 years ago

Carl just now:

June S&P E-mini Futures: Today's range estimate for the June contract is 1143 – 1156. I think a drop into the 1120-30 zone is imminent. Looking further ahead, look for the ES to reach the 1200 level by the end of May.

1134 -1145.50 actual range yesterday (11.5 points)
1143-1156 estimated range today (13 points)
Currently 1151, so -8 to +5 from here

gcocks83
gcocks83
14 years ago
Reply to  Earl of

Earl, I just sold my TZA. Are you in TNA

Earl of
Earl of
14 years ago
Reply to  gcocks83

Am not in either at the moment. Wanted to get TNA this morning, but it's up 1.5% already.

Earl of
Earl of
14 years ago
Reply to  gcocks83

TNA has been a bit of a falling knife this morning. Still waiting.

gcocks83
gcocks83
14 years ago
Reply to  Earl of

Of course you should be in TZA since I sold.

Earl of
Earl of
14 years ago
Reply to  gcocks83

TZA hasn't been working for me lately. Trying to avoid it.

monicadern
monicadern
14 years ago
Reply to  Earl of

Nothing continues the same way forever.

Earl of
Earl of
14 years ago
Reply to  monicadern

I need a day where I really regret avoiding TZA. all I have lately is days I have regretting buying it.

monicadern
monicadern
14 years ago
Reply to  Earl of

Well, i have been holding it for months now, imagine how I feel!

SC
SC
14 years ago
Reply to  monicadern

You really cannot hold leveraged ETFs over time. Remember the FAZ when it was at $55 presplit? It is $1.45 presplit now. The chance of recouping that, is ZERO. I bought those at $5 (presplit). I was very proud that I got in after it has dropped 95% and bravely announced that I would double up if it got to $2 (presplit). Well it is at $1.45 (presplit now). FAZ will not recoup the losses incurred by those who bought it at $85-$55(presplit) all the way down. Not in their lifetime. Even my original $5 presplit would take a series of mega turn of calamity to recoup. (P.S. I didnt hold nor added to it. Puked them all out just in time for the July 09 ''To Da Moon” blast off. Pure luck to have puked those BEFORE the blast off. It was someonelse's work that got me to sell. My own work would have gotten me out days later, with some losses for sure.)

If you hold 3x etfs, by the time P3 comes, you would make 200% of the etfs. But it is 200% of an ETF that may have already lost 90%-99% of your original investment. You would need several P3 just to breakeven.

You can buy and hold a stock as the stock has an underlying business entity, which unless going bankrupt, has intrinsic value. The thriving business will bail out the stocks over time. 3x ETFs are lottery tickets. The money lost is gone forever. In stocks, barring bankruptcy, losses are just paper loss. But that is not the case with leveraged instruments.

Leveraged instruments are for very precise timing. They are for short term tactical move. They are not for attrition warfare against the market.

Not saying this to make anyone feel bad. Just hope that someone would learn something useful and this may spare some misery.

monicadern
monicadern
14 years ago
Reply to  SC

SC – yes, unfortunately, I have become aware of my own folly over the past few months. Even when we have a flat day I lose money. Leveraged ETFs are not to hold. But at this point, I am holding for another week! Even if we drop 100 points on the S&P, I don't think I will break even. Sad but true.

gcocks83
gcocks83
14 years ago
Reply to  monicadern

So why hold any longer? Like you asked me this morning why did I sell?

gcocks83
gcocks83
14 years ago
Reply to  SC

SC nice post. I have been burned by 3x to many times to count. I have seen the best post about leveraged ETF's by the people that have been hurt by them the most.

gcocks83
gcocks83
14 years ago
Reply to  gcocks83

I have even gone as far as to take them off my watch list. Less temptation that way.

Earl of
Earl of
14 years ago
Reply to  SC

SC,

Let's say you had $100,000 a year ago, and divided it into three parts:

$33,333 to stay in cash
$33,333 to buy TZA (a 3x inverse ETF)
$33,333 to buy TNA (a 3x ETF)

I know you say that you really cannot hold leveraged ETFs over time. But let's say you decide to hold these for a year to see what happens.

Take a look at these results:

After one year, the cash is still worth $33,333
After one year, TZA fell 90% to $3,434
After one year, TNA rose 260% to $120,074

After a year, your original $100,000 is now worth $156,842.
That's a 56% increase in one year.

That's really not that bad.

SC
SC
14 years ago
Reply to  Earl of

LOL.. U is awesome. If this gig doesnt work, you will do well as a comedian.

monicadern
monicadern
14 years ago

Awesome post Red. Thanks for all your contributions Sundancer. I will sink for a little while longer here. It ain't fun but what is a little while longer of pain (I hope)?!

monicadern
monicadern
14 years ago

Unfortunately, i think it would have been better for us bears for the market to go up today to reach those few key levels. This could just stretch the whole thing out.

sundancer390
sundancer390
14 years ago

inflection dates from the previous 3 years & current $SPX sequence

10/11/07'
10/10/08'
03/09/09'
03/ ? /10'

monicadern
monicadern
14 years ago
Reply to  sundancer390

According to your sequence pattern, it should have been 3/8/10 (feel like this is like those IQ tests which I typically fail miserably at). Since after 11,10,9 comes 8. But, that didn't happen so randomly I am guessing a turn date of 3/16 – Tuesday. Today is Friday the 13th – seems too obvious!

SC
SC
14 years ago
Reply to  monicadern

It is not about the precise date, but rather it is what happend around those dates when the Sundancer SPX sequence occurred just before, that is relevent. Whatever trend the market was in, the Sundancer's specific sequence produced a subsequent change in direction. *** If*** the past pattern holds, we are heading right into a correction. It may be sharp but it can also be side way.

gcocks83
gcocks83
14 years ago
Reply to  SC

I agree with you. None of the corrections have been that great in the last year. 5-10%. Then right back up.

SC
SC
14 years ago
Reply to  gcocks83

5-10% is bad enough if your options are on the wrong side. lol

As is, that is 50-100 es points. I wouldnt mind bagging those. No sir, not at all. In fact I would give thanks to Allah, Jesus, Buddha and Odin.

monicadern
monicadern
14 years ago
Reply to  SC

Thanks for the explanation SC and thanks for the info Sun.

monicadern
monicadern
14 years ago
Reply to  sundancer390

Looks like we are closing with the VIX below 17.95. Ugh – another week of flat/up.

sundancer390
sundancer390
14 years ago
Reply to  monicadern

it's going to provide for some interesting dynamics next week

since the week of 8/13/2007 there have been no consecutive sequences in the $VIX that stop @ 5, the two sequences that stopped @ 6 provided some very powerful moves in the $VIX

Red Dragon Leo
14 years ago
Reply to  sundancer390

Does this close down on the VIX make 5 or 6 weeks in a row?

sundancer390
sundancer390
14 years ago
Reply to  Red Dragon Leo

5

***if*** the market breaks to the downside next week it will be much bigger than most people expect, there's very little to room on the 60 min as the max contain pt. is @ 113.35 and rising rapidly every hour

given that the $VIX didn't make any new lows this week, it looks like it's on the launching pad to me

monicadern
monicadern
14 years ago
Reply to  sundancer390

Sorry to keep bothering you Sundancer but I thought if the VIX closed below 17.95 today (which it did), that meant the market would melt up next week which would be bad for the bears?

sundancer390
sundancer390
14 years ago
Reply to  monicadern

***if*** the $VIX behaves like it has since the week of 8/13/07 then the $VIX is going to close lower next week

the *** being we have parabolas on the daily charts, the parabolas can continue their climb into a total blow off or break hard at any time

monicadern
monicadern
14 years ago
Reply to  sundancer390

Ok, thank you.

Earl of
Earl of
14 years ago

Carl at day’s end:

1143-1156 estimate today for /ES (13 points, June Expiry)
1142 -1150.25 actual today (7.75 points)

Trades: none today

sundancer390
sundancer390
14 years ago

for those with eagle eye's will notice the $SPX close, another sun ritual in the books

1149.99 (6=9) 1146.66 ; clever clever operators

monicadern
monicadern
14 years ago
Reply to  sundancer390

Hmmm. Satan behind the markets then 🙂

monicadern
monicadern
14 years ago
Reply to  sundancer390

Sundancer, each indice also closed with 3 6's in them (if you turn the 9s upside down), and the last two digits on each of them were a 6 or a 9. Quite eerie.

Earl of
Earl of
14 years ago

TNA opened up 1.6%. 8th up opening in 10 days. Gap today was filled, and TNA was up 1.6% at the high. TNA closed down 0.2%.

We are in a Full Moon Trade, which favors TNA.
After ten days, this trade is up 24%.

Volume for TNA was fairly high (3rd highest in 13 trading days)

$RVX (VIX for $RUT) closed 0.8% lower with TNA down 0.2%. A small divergence. A little bit good for TNA.

TNA was slightly down today, before this had been up 20 of the past 22 days.

The high for TNA today was $55.10, highest high since November of 2008)

Ultimate Oscillator for TNA peaked at 78 fourteen trading days ago and has generally fallen since then but has remained above 50 and is currently 69. Indicating continued strength for TNA.

Bollinger Bands for $RVX (VIX for $RUT): today’s candle touched the Bollinger Mid Line and fell back (2nd day in a row). The lower Bollinger band is rising. Looks like $RVX might no longer be rising, which is good for TNA.

Bollinger Bands for $RUT: The black candle for $RUT moved farther from the rising upper Bollinger Band, indicating that $RUT might pause here or begin falling. Not good for TNA.

Bollinger Bands for $RUT:$RVX ($RUT vs VIX for $RUT): today’s candle rose again moving toward the upper Bollinger band. Hard to read as the upper band is off the chart, but perhaps indicating that TNA will continue to rise.

In spite of closing lower today, TNA had a higher high and a higher low – good for TNA.

The TNA candlestick today seems to imply a down day for TNA on Monday. I will post the AmericanBulls candlestick interpretation a bit later.

Overall, it looks like TNA might fall Monday. (Candlestick trumps everything else)

gcocks83
gcocks83
14 years ago
Reply to  Earl of

nice post

sundancer390
sundancer390
14 years ago

***if*** there is a gap down on monday, it's going to create some interesting setups

GS-daily chart
http://www.flickr.com/photos/47091634@N04/44282

Earl of
Earl of
14 years ago

The view from Americanbulls

TNA is a SELL-IF (Sell on Monday if conditions are met). The candlesticks of yesterday and today combined to form a Bearish Meeting Lines Pattern (a bearish reversal that requires confirmation). Basically, sell on Monday if it appears likely that the close will generate a black candlestick.

TNA is now up 47% since the buy signal on Feb 9th. TNA was $36.69 at the time, and closed today at $54.14.

TZA is a BUY-IF (Buy on Monday if conditions are met). The candlesticks of yesterday and today combined to form a Bullish Meeting Lines Pattern (a bullish reversal that requires confirmation). Basically, buy on Monday if it appears likely that the close will generate a white candlestick.

TZA is now down 33% since the sell signal on Feb 9th. TZA was $11.04 at the time, and closed today at $7.30.

Summary: Possible reversal confirmations on Monday.

sundancer390
sundancer390
14 years ago

IWM co-relational volume:

2/05/10 19,299,440 9:30 60 min print
3/12/10 19,381,466 9:30 60 min print

sundancer390
sundancer390
14 years ago

SPY : RIMM co-relational move

http://www.flickr.com/photos/47091634@N04/44297

sundancer390
sundancer390
14 years ago
Reply to  sundancer390

sequence in RIMM

88.08 – high
35.05 – low
53.03 – diff-high/low

bear/bull
bear/bull
14 years ago
Reply to  sundancer390

whats the implications of 53.03? Are you saying that the next target?

monicadern
monicadern
14 years ago
Reply to  sundancer390

Think I got it. Thanks.

Earl of
Earl of
14 years ago

I posted this in response to a post from SC, wanting to say something nice about 3x ETFs after SC blasted them. Then I realized it's pretty much buried in a conversation and no one will see it, so I'm posting it here.

Let's say you had $100,000 a year ago, and divided it into three parts:

$33,333 to stay in cash
$33,333 to buy TZA (a 3x inverse ETF)
$33,333 to buy TNA (a 3x ETF)

I know you say that you really cannot hold leveraged ETFs over time. But let's say you decide to hold these for a year to see what happens.

Take a look at these results:

After one year, the cash is still worth $33,333
After one year, TZA fell 90% to $3,434
After one year, TNA rose 260% to $120,074

After a year, your original $100,000 is now worth $156,842.
That's a 56% increase in one year.

That's really not that bad.

SC
SC
14 years ago
Reply to  Earl of

It all depends on how you want to define “over time”, Earl.

If within your holding period, the market makes a trending move over 33%, then buying and holding a 3x etf and its inverse is a strategy that will always yield a positive returns. Not necessary superior returns, however. Under such conditions, the statement “you cannot hold 3xetfs over time” would be wrong.

If you buy and hold 3x etfs, then over time, as in eventually, not just during 1 specific holding period, you will end up losing everything. Because if you buy and hold, eventually, over time, the market will experience a 33.33% move against you. Your 3x ETFs will magnified that into a 99% lose. That is a mathematical certainty. The geometric mean of any 3x ETF is for all practical purposes, just about ZERO, over time.

Thus technically my statement is valid. 🙂 It is just not precise.

Lets look at the last year.

I am using data from StockFinder. I created a spreadsheet

http://spreadsheets.google.com/ccc?key=0ApppzmO

As you can see, depending on the invested period, your TZA + TNA may or may not work. The spreadsheet is self explainatory. It shows investing half in TZA and half in TNA, vs the RUT, and shows two different investement periods. One started where first data is available in StockFinder, and the other started at around the March 09 bottom.

The data provides a glimpse into the effect of compounding geometrically and rebalancing daily. If you dig yourself a hole, then it takes a lot to climb out of it. 3XEtfs are powerful hole diggers. LOL

Earl of
Earl of
14 years ago
Reply to  SC

Regarding: If you buy and hold 3x etfs, then over time, as in eventually, not just during 1 specific holding period, you will end up losing everything. Because if you buy and hold, eventually, over time, the market will experience a 33.33% move against you. Your 3x ETFs will magnified that into a 99% lose. That is a mathematical certainty.

— — — – — —- —

SC,

A 33.3% move in $RUT against the 3x ETF would be painful, but not as painful as you describe.

A 1% loss in $RUT 41 days in a row would result in a 33.71% loss in $RUT, and a 71.3% loss in TZA (not a 99% loss).

It would take 151 days of a 1% $RUT loss every day to lose 99% on TZA. And at that point, $RUT would have lost 78% (not 33.3%).

I got that from a spreadsheet I made up. As a sanity check, I looked at the last year — $RUT was up 72%, and TZA was down 90%.

Compounding destroys the 3-1 ratio during trends.

SC
SC
14 years ago
Reply to  Earl of

Again you are correct in the specific scenario (a consistent daily 1% grind) you use. If the market trends one direction uniformly, the resulting leveraged result is superior to what the nominal leverage would imply, due to daily rebalancing. So if the market trends down consistently compounded daily, rebalanced daily, the 3x would end up losing less than 3x the total market decline over the same period, while the 3x INVERSE would gain greater than 3x what the market lost. Vice versa.

That is when the market trends consistently. If the market goes up x amount and then reverses by the same x amount, and alternates over time, the market can end up essentially unchanged, while both the ETF and its inverse erode. For example 11/10/09 to 07/10/09.

The worse situation would be a prolonged saw tooth movement against your etfs. That would just erode the value greater than the nominal leverage would imply.

Of course neither a consistently trending scenario nor a consistently oscillating scenario is realistic, at least not over time.

It is safe to say that market seldom trends consistently, but rather spends most of the time in saw tooth pattern with slight trending tendency from time to time. That lends weight to the argument that holding etfs over time is not advisable.

Earl, try this. Code your spreadsheet to show market alternating between up 2% and down 2% next. Run that for 100 days. Invest equal amount in a 3X and its inverse. At the end of 100days, market is unchanged. Look at where the etfs are. Run it 250 days. Market would be down 3-5%, but look at where your inverse is. .

Earl, you can't just assume that a 33% loss in RUT would just result in 71% loss in the TNA. Or it would take a 78% loss in the market to take your etf down 99%. (I concede that due to daily rebalancing, it would be mathematically very hard to go to -99%. But for practical purposes, losing 99% vs 90%…. it will suck just as bad. lol) It all depends on how that decline unfolds. You can create a scenario where the market is only down 20% while the TNA is down 80%, or where the market is down 30% and the TNA is down 90%. Now if the market can only unfold its decline in 1% a day with no back tracking, nor big drop, then all your numbers would be true. That is not realistic. In my 2% daily whipsaw example, the market may be down 8-10% in two year, where both your etf and its inverse are down around 60%. That is hypothetical of course.

Earl of
Earl of
14 years ago
Reply to  SC

SC,

I will concede that buying and hold at 3x ETF can get painful when the market goes against it. I like Americanbulls in that regard, as it will eventually generate a SELL signal for a 3x ETF when things go badly.

SC
SC
14 years ago
Reply to  Earl of

Holding anything is painful when the market goes against it. lol

Yes it is true in that American Bull does not get caught in the wrong trend, not for long anyway. I do not know how much whipsaw it may incur. I hope they would show the result based on the close of the day, instead of the open. May be I misunderstood their site. But thanks for bringing that site to my attention. I have never paid any attention to candle stick in the past. But that is a very interesting site.

sundancer390
sundancer390
14 years ago

today is 3.14

Don't ever forget the Pi proportion.

Since today is SUNday and the market is closed where & when was the Pi ritual performed?

It was performed on 3.12 & AAPL held the ritual. (Would you like some AAPL Pi?)

The open & high on 3.12 in AAPL was 227

22/7 = Pi

Since the market is closed on 3.14 why was the ritual performed on 3.12 vs 3.15.

3*12 = 36

Sum of 1:36 = 666

The co-relational Pillars of the construct on display friday. It was a very very important day on friday.

I'll talk about the $SPX co-relational value : date this week sometime.

monicadern
monicadern
14 years ago
Reply to  sundancer390

very very interesting. Thanks Sundancer.

sundancer390
sundancer390
14 years ago
Reply to  monicadern

AAPL is one big ritual

The list price of the Apple I back in july 1976 was $666.66

AAPL released the Power Mac line on 3.14 1994

Earl of
Earl of
14 years ago

SC,

I will concede that buying and hold at 3x ETF can get painful when the market goes against it. I like Americanbulls in that regard, as it will eventually generate a SELL signal for a 3x ETF when things go badly.

SC
SC
14 years ago

Holding anything is painful when the market goes against it. lol

Yes it is true in that American Bull does not get caught in the wrong trend, not for long anyway. I do not know how much whipsaw it may incur. I hope they would show the result based on the close of the day, instead of the open. May be I misunderstood their site. But thanks for bringing that site to my attention. I have never paid any attention to candle stick in the past. But that is a very interesting site.

Earl of
Earl of
14 years ago

Regarding: If you buy and hold 3x etfs, then over time, as in eventually, not just during 1 specific holding period, you will end up losing everything. Because if you buy and hold, eventually, over time, the market will experience a 33.33% move against you. Your 3x ETFs will magnified that into a 99% lose. That is a mathematical certainty.

— — — – — —- —

SC,

A 33.3% move in $RUT against the 3x ETF would be painful, but not as painful as you describe.

A 1% loss in $RUT 41 days in a row would result in a 33.71% loss in $RUT, and a 71.3% loss in TZA (not a 99% loss).

It would take 151 days of a 1% $RUT loss every day to lose 99% on TZA. And at that point, $RUT would have lost 78% (not 33.3%).

I got that from a spreadsheet I made up. As a sanity check, I looked at the last year — $RUT was up 72%, and TZA was down 90%.

Compounding destroys the 3-1 ratio during trends.

SC
SC
14 years ago

Again you are correct in the specific scenario (a consistent daily 1% grind) you use. If the market trends one direction uniformly, the resulting leveraged result is superior to what the nominal leverage would imply, due to daily rebalancing. So if the market trends down consistently compounded daily, rebalanced daily, the 3x would end up losing less than 3x the total market decline over the same period, while the 3x INVERSE would gain greater than 3x what the market lost. Vice versa.

That is when the market trends consistently. If the market goes up x amount and then reverses by the same x amount, and alternates over time, the market can end up essentially unchanged, while both the ETF and its inverse erode. For example 11/10/09 to 07/10/09.

The worse situation would be a prolonged saw tooth movement against your etfs. That would just erode the value greater than the nominal leverage would imply.

Of course neither a consistently trending scenario nor a consistently oscillating scenario is realistic, at least not over time.

It is safe to say that market seldom trends consistently, but rather spends most of the time in saw tooth pattern with slight trending tendency from time to time. That lends weight to the argument that holding etfs over time is not advisable.

Earl, try this. Code your spreadsheet to show market alternating between up 2% and down 2% next. Run that for 100 days. Invest equal amount in a 3X and its inverse. At the end of 100days, market is unchanged. Look at where the etfs are. Run it 250 days. Market would be down 3-5%, but look at where your inverse is. .

Earl, you can't just assume that a 33% loss in RUT would just result in 71% loss in the TNA. Or it would take a 78% loss in the market to take your etf down 99%. (I concede that due to daily rebalancing, it would be mathematically very hard to go to -99%. But for practical purposes, losing 99% vs 90%…. it will suck just as bad. lol) It all depends on how that decline unfolds. You can create a scenario where the market is only down 20% while the TNA is down 80%, or where the market is down 30% and the TNA is down 90%. Now if the market can only unfold its decline in 1% a day with no back tracking, nor big drop, then all your numbers would be true. That is not realistic. In my 2% daily whipsaw example, the market may be down 8-10% in two year, where both your etf and its inverse are down around 60%. That is hypothetical of course.

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