TB:" downticks "
>I don't buy into the "small caps will shine" theory. We have witnessed over and over that this is a liquidity driven markets. When the rush to exits occurs, the little puppies get absolutely obliterated. Hell, many of them have not recovered from the the 1996 sell-off...
...yeah, I know man; that's what I was trying to say, really: that if some kind of "rotation" were to occur, (similar to the one we just experienced, where growth stocks kinda stopped and basic industry cyclicals that few of us owned went ballistic), where LargeCaps in general went flat for awhile and kapital shifted over to SmallCaps en masse - that that would be a particularly startling and wicked kind of rotation to occur, if it happened.
>I show it (IBM) sitting 21% above the monthly trend line. The five year average PE is 20. Now, I really believe that IBM will benefit from the future expansion of the internet. However, I really have a problem with both the technical and fundamental attributes of this puppy...
so... TechStock valuation would be your main concern and reason for a bearish bias right now; I'll buy that, insofar as F/A goes.
Strategically, FWIW I believe IBM has re-invented themselves well. I like their shift from box-maker to box-components supplier... their arrangement with DELL being an example. They have always had a strong corporate IT services presence. I like their intention to enter into the Data Warehouse (eg., EMC) and/or "Server Farm" arena. I don't understand, or perhaps I should say "know enough about" IBM's strategy for growing tele-communications/networking revenues. Finally, I'd like to see IBM develop or, grow a kind of "GE Capital" (or "IBM Capital") function, because financial services and investment banking would suit them well, IMHO. The economist in me believes that it is perhaps the destiny of all these big Tech bellwethers to become financial powerhouses, not unlike GE.
>USPIX is one of the ProFunds...
yeah, that's the fund family I'd play with; I've always been intrigued by them, Berney - they have all the (IRA-enabled) instruments one needs: long index / short index / neutral money market. Their leverage effects approach 2:1 over equivalent SPY or QQQ movements. Unlike index options, they appear to exhibit little "time value decay" or "slipping" phenomena. No commissions (after entering the family) is appealing (perhaps offset by inherent fund management fees, I dunno). They are end-of-day NAV entry and exit vehicles, however; index movement targets less than +/- 5% might be tricky to trade cleanly, I dunno.
>I really like Captain Jim's concept of securing a portion of USPIX now and offsetting it with QQQ. Seems that a 1/3 USPIX position and a 2/3's QQQ position would maintain a slightly bullish position, with the ability to close the QQQ position with the intra-day ticks and tocks. At this point, I'm just thinking out loud and welcome opinions...
Well the reason why you may like it is because it appears to be, at first glance one of our favourite spreads.
USPIX is a 2:1 leveraged "short" SPX vehicle. Consider, is 2:1 = short SPX : long SPX (or, USPIX:SPY) is this the same thing as a "2:1 PUT Ratio BackSpread", with a twist? If the major market goes up, you make a little money; if it goes down, you make a lot of money. But, is Captain Jim's "spread" really "biased"... would it perform "like a Ratio BackSpread" ?
What is it? Jim's construct, 2 x QQQ : 1 x USPIX, where USPIX = 2:1 short SPX.X, is a tricky way to execute a simple "1:1 Long Straddle", where you are long and short, (using the weights you mentioned, there does not appear to be "a slightly bullish position" bias, Berney, save for the perceived divergence between NDX and SPX) and make money if the market(s) go up or down, and lose money only if nothing happens. The apparent advantage is that you're not doing options directly and, time value decay is not much concern.
But the construct is inconsistent with what your F/A is telling us.
For Jim to "win big", Berney - he needs for the SPX to go down, while the (over-valued) NDX goes up.
If we were faithful to your F/A, Berney - we would construct a "PUT Ratio BackSpread" such as 2:1 = short NDX : long NDX.
Then, if the NDX goes up, we either make a little money or, don't lose anything; and if the NDX goes down per F/A, our profits are unlimited.
The tricky part about Jim's construct is that, rather than simply executing a classical "Straddle" or "Ratio BackSpread" on one sector index; eg., he suggests 2:1 = QQQ : USPIX@2:1 ... which is equal to 2:2 = 1:1 = QQQ:SPY Long Straddle -- Jim is really making a kind of arbitrage bet between two different sectors; ie, Long TechStocks and Short SPX-500. It's "tricky" because NDX-100 is imbedded within SPX-500; Therefore, to realize maximum gain a divergence must occur between NDX and SPX that runs counter to your F/A.
Using the leveraged (SPX or NDX ProFund @ 2:1) : SPY or QQQ is an intriguing idea, that Jim deserves credit for exploring and revealing to us.
Long or Short "Ratio BackSpreads" are appealing because, if the market goes against your (long or short) 2:1 bias, you either: (A) still make a little money or, (B) don't lose any money - because: the "spread" consists of index/equity options with a net credit taken in. If the index/equity moves in the direction of your BackSpread "bias", profits are unlimited. The "ratio backspreads" are my favourite constructs (^_^)
Using a ProFund with inherent 2:1 leverage in place of index options means that there is no "net credit taken in" received from the sale of one side of the options' spread. To me it looks like a 2:1 PUT Ratio BackSpread would thus be impossible to realize with say, USPIX:SPY ... not sure - first glance analysis.
Perhaps USPIX:SPY does work, and appeal if one thinks of it as a kind of "calendar spread" hedge, where one is likely to hold SPY long-term and bet 2:1 short in the near-term.
When it comes to spreads, Berney, what I gotta do is roll up my sleeves, put on the green eye-shades {grin} and crunch a spreadsheet showing the profit or loss for each side of the construct, thus the net gain or loss for the spread with respect to any single index/equity price level. Just no way around countin' those beans !
My father used to wink at me and say, "when you spread out the beans, man - they cool quicker ! "
-Steve |
