Transcription:

Hey, Dan Murphy here.
Today’s update is going to be a little different, and I’ll show you what I mean in a minute. In case you didn’t know this already, and I know I sent out an email on Wednesday’s close, but The My Smart Money Indicator, the long term planning model for the S&P 500, has flipped over to a short signal.
It's saying that the S&P 500 should go down over the long term. That doesn't mean we're not going to see the markets rebound. The market indices are mean reverting which means they will tend to zigzag up and down. They don’t go straight down. I'm looking to short into rallies.
What I want to talk about today and the reason why I’m showing the bank index right here, is I want to give you some lessons about why not to use leverage ETF’s over the long term or more than a few weeks in general.
Now before I do that, I do have some fun stuff to do. It’s so funny, it was one of the more political messages. The other day when I was talking about the 99%, and how there seems to be some class warfare going on right now against the 1%, I don’t really express too much politics. What was funny today is, I found out that my ex-girlfriend; she’s the one that was into politics. She was featured on the Colbert Report, as part of the Ron Paul 2012 calendar. It’s pretty funny, I’m not going to say which one she is, but I’ll talk about it in a minute. Stay tuned for hotties.
What I wanted to show you here that’s going to help you out a lot, that’s what I’m here to do is I want to help you as much as possible. The more I give, the more I gain. It’s one of those universal laws of the universe, is what it seem like.
Here’s the bank index. This is the hardest hit index of all the large caps. That peaked February 2011. That thing sank like a rock. Now the way you might expect to make some money out of this damn thing, besides shorting it, is you buy those inverse funds. You remember I was telling you to be careful about the inverse funds, especially the leveraged? It’s because the rebounds daily. Every single day they rebound these damn things.
Let’s see what would happen if you shorted here in February 2011. Instead of shortening, you use one of these leveraged inverse funds that is supposed to go up when the bank stocks go down. The three times leveraged fund for that is FAZ.
Let’s check out and see what happened to FAZ. Here it is in February, and that’s down 37 or so. After falling like a rock, it’s only at 47 now. On this recent decline, this leverage ETF made a lower low.
If we switch over to the bank stocks, BKX, the banks were not even close to making a high. Not even remotely close. This is the biggest pitfall I have to warn you about for trading ETF’s. You don’t want to do more than slay trade these leverage ETF’s. Even then it is a little bit questionable, especially if they’re more leverage. The more leverage they are, the worse off it gets.
Even the one I was showing you yesterday, you can look at SH, and that’s supposed to profit, when the S&P 500 falls. So far we are in the black on that signal. Maybe we will get a mean reversion here. That’s usually the classic way it does it. Sometimes you get a fat tail, which in statistics means you get an outsized move in the direction of that indicator.
What I really want to show you here is I don’t want to babble about all that stuff. I want to focus a little bit on this topic, which is basically even on SH which is a non-leverage inverse fund of the S&P 500. That equalled its low, so on the S&P 500 you would expect it to match the high.
Flip over to SPY, which has not re-bounced daily. That rally did not reach the prior high. None of these inverse funds are perfect, so I really want to stress that. The only way that you can avoid all this is to buy S&P 500 futures or to short the indices. A lot of people look to short these inverse funds. They rebalanced and tend to get all screwy, unfortunately a short interest.
It’s usually hard to borrow some of these things. It depends on your broker, in order for them to get inventory. I just want to show you, common sense in no uncertain terms, that these things are not the best for long term timing. It gets way worse the more leverage they are. The non-leverage, they still have some of the pitfalls, but they are not going to be as bad for you. A lot of what people might do is short SPY, or what I personally do is I short the E mini futures contracts.
Just to re-iterate what I said yesterday is I’m looking to short into any rallies, and I might be doing some shorting for other reasons as well. We do have leading indicators in gold and the S&P 500 and so forth.
Let’s go back to that topic. It was pretty funny to see that show, and one of these beautiful girls - I’ll say the most beautiful girl there in the calendar is my ex-girlfriend. But in all that’s just tongue in cheek, they are all beautiful women, and I will go ahead and link you over to the Colbert Report. It is pretty funny.
I’ll catch you next time, Dan signing out.