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Pastimes : The Philosophical Porch -- Ignore unavailable to you. Want to Upgrade?

To: Rarebird who wrote (341)	2/11/2006 7:45:30 PM
From: Rarebird	Read Replies (2) \| Respond to of 26251

Red Flag: I am now completely hedged. On Friday, February 10, 2006 at 1:05 pm EST, I bought UCPIX and UIPIX at Friday's closing price of $17.07 and $16.20 respectively. UCPIX: "The ProFunds UltraShort Small-Cap Fund seeks investment results, before fees and expenses, that correspond to 200% the inverse of the Russell 2000 Index." UIPIX: "The ProFunds UltraShort Mid-Cap Fund seeks investment results, before fees and expenses, that correspond to twice the inverse of the performance of the S&P Mid-Cap 400 Index." Currently, I own 3 small cap funds (AVALX, PENNX, LKSCX) and one midcap fund (FAIRX). The dollar amount I invested in UCPIX represents 1/2 the dollar amount I invested in the sum total of my 3 small cap funds. And since UCIPX corresponds to 200% the inverse of the Russell 2000 Index, these 3 funds are now completely hedged. The same method applied to my hedging FAIRX with UIPIX. The intention here was to reduce as much risk as possible (without selling my longs) since Risk greatly outweighs Reward here. And there is much Risk in equity land. The main risk is that the Fed has now become Restrictive. This is why the POG and Crude Oil have been declining since the last Fed rate hike. Moreover, the inverted yield curve has become even more pronounced today. Every yield curve inversion has been followed, if not by an economic recession, at least by a profits recession. I severely doubt it will be "different this time". I'm looking at a mild 6-9 month cyclical Bear Market here with a likely 10%-20% decline in the major averages. The Russell 2000 and S@P Midcap 400 will probably decline more than the S@P 500 here partly because the small and midcap stocks led the previous advance. The buy of a lifetime will be coming after the November 2006 midterm elections, with the small and midcap stocks leading the way again. I know the chartists will say that there is no confirmation of the Bear here. But by the time that confirmation is given in the form of a chart, major losses will have occurred. The purpose here is to anticipate the movement of the chart. The driving force of the current Bull has been led by commodities and small and mid cap stocks, along with a very strong advance/decline line. Over the past 2 weeks, breadth and leadership (new highs vs new lows) have both deteriorated quite a bit. The current weakness likely represents the beginninhg of a cyclical bear market. It is no accident that the sectors that have primarily led this bull market higher have now begun to roll over. If I'm wrong here and this turns out to be nothing more than a bout of profit taking (or a rotation into large caps), I can easily close my hedges and return to a more constructive long position. Capital preservation is what comes first in a bear market. This is why I have established hedges. Although the primary intent here is to shield my longs from devastating losses, I can certainly profit if the stocks in the mutual funds I own outperform the indices I've shorted (Russell 2000, S@P Midcap 400). That is certainly possible given the outstanding record of the managers of these funds. The key to maximizing profit on Wall Street is to spot market trends early, especially Bear trends. The old adage, "it is better to be safe than sorry", certainly applies here. PS Moving forward, I'll be looking forward to selling short for the sake of Profit. Grrr...