Who Said Pigs Can’t Fly?

***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…

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

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.

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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.

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.