02 February 2008

How I Am Playing Market Swings

Lookee! Lookee! I made a gwaph with pwetty colors.

After that bit of juvenalia, if you dare to look closer, it's a grid with the 30 Dow component stocks, and their 2-day and 14-day RSI readings at the close of the market for those respective dates listed at the top.

Red means that issue has a RSI(2) reading at or above 90, while green means the RSI(2) reading is below 10.

The overall Dow, via DIA, closed today with a RSI(2) reading of 92. 16 out of 30 Dow components are marked with red.

These (relatively) simple statistics tell me that the Dow is hankering for a pullback. Over half of the Dow is short-term overbought. But how will I make a quick-ish play (and some ducats) without dabbling in options or actual shorting?

DXD, a 2x-leveraged short Dow fund from Proshares that attempts to double the daily movement of the Dow. There's also DOG, a 1x-leveraged short Dow fund, but as a short-term play, I want the added price movement of DXD over DOG.

And next time my Dow chart is greener than Ireland, I'll be considering DDM, the 2x-leveraged long Dow fund over the Diamonds.

Barry Ritholtz discussed
these 2x-leveraged index longs and shorts back in the summer of '06 when some of the aforementioned funds appeared on the market. He brought up liquidity questions and other growing pains with a new issue that have since dissipated.

The Bottom line remains: These are good product for hedging in accounts that either cannot short or use options; And while they are also superior to mutual funds, they remain are inferior to traditional ETFs. Hopefully, as they become more popular and liquid, these pricing / spread / delay issues will work themselves out.

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