Very Difficult Trade

Yesterday, mid day, I sold half of my SDS across the board.

As I sat there with my finger literally on the button the SPX was between 1150 and 1155. At that level it was down 26.5% from the peak of 1565. I don't think I would get much of an argument in saying 26.5% is down a lot.

Sentiment stinks, no one has faith in anything, the consequences from all the stuff happening will be bad, you can't swing a dead terrorist without hitting a bailout (or similar action), the house of representatives acted as childish as I can ever recall (I don't follow politics that closely however), the US and global financial systems are under siege and there is more.

Getting less short after a 26.5% drop in the broad market is not the worst possible trade (hopefully I am not proven wrong). Selling half of SDS does not radically change the defensive nature of the portfolio but if it tanks again clients will feel it more than before. I had my finger on the button for something similar Monday toward the close but did not do it, I was expecting/hoping for follow through Tuesday morning at which point I would have sold it all.

I think in terms of price we may be close to the bottom (my assumption all along has been SPX 1095), in terms of time I think, perhaps too optimistically, that things could start to turn up in Q2 2009. I also think that passing of a bailout (don't confuse that with my thinking it is a good idea or that it is well constructed) will dampen the volatility that we have seen lately.

This trade was difficult because obviously SDS has, IMO, done its job throughout this bear and by selling half (subject to rounding) I have less protection at a time when things are all hitting the fan at once.

So this move was part contrarian, part having seen the market do this before and maybe a couple of other things. If it turns out to be wrong, the remaining shares will grow relative to the portfolio on the way down just as was the case before.

With no other details, the idea of being less hedged after such a big drop does make sense. I mentioned the other day about times like now being more difficult to operate in. For some folks that might mean hanging in there at a tough time, or maybe taking some hedge off after a huge drop. I think if you can do the tough thing more often than not you have a very good shot at long term success.