This is getting interesting.
We shorted the S&P 500, as noted in yesterday's Live Trading Webinar, right at our 3,135 line on the last cross and this morning we got stopped out after almost testing the 3,000 line and we've been over and under our line since and the next time we test it, we're going to short it again.
Our hedges are doing their job as the Long-Term Portfolio fell from $883,615 on Friday to $836,750 yesterday (down $46,865) while the Short-Term Portfolio rose from $521,687 to $540,485 (up $19,098). That's exactly what your hedges should be doing – MITIGATING half your damage on the way down. If your hedges are completely reversing the damage – you are probably over-hedged.
Why is that? Because if you have $100,000 and you put $85,000 in longs and $15,000 in hedges (our standard ratio), then if the market drops 20% your longs drop $17,000 but the hedges, which we play with 3x ETF and options, gain about $7,000 ideally. Because we also hedge our hedges, you don't see the full effect right away but mitigating 50% of the damage is close enough.
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So now the market has dropped 20% and what do you have? You have $92,000 – that's only down 8%. That in itself isn't very exciting but that's where Part 2 of our strategy comes in because, since we are not very damaged by a 20% drop, we are in a great position to go bargain hunting for stocks that over-reacted to the downside (and that is what our Watch List is for) and now we can buy our stocks for a 20% or greater discount and, using our other options strategies and taking advantage of the higher VIX – we can buy stocks closer to a 40% discount with our $92,000 in buying power.
See how simple that plan is?
We constantly monitor the balance between our long and short positions and, at the moment, we're able to maintain it but, when the market is such that it's no longer easy to hold our balance – then it's time to cash in our portfolios and move our stock back to the sidelines. No strategy is foolproof and the cost of hedging against a drop greater than 20% makes it difficult to make up for the hedges if the market continues higher. In other words – in periods of great uncertainty, it is best not to put a lot of money in the market. See how simple this is?
JP Morgan is right, Capitalism is generally a scam the rich play on the poor. When times are good, they pump up their stock prices or land prices and they entice the poor to buy them with various schemes to make it "easy", like Robin Hood trading or no money-down mortgages.
That's when JP Morgan and Co. sell you their assets and then the bubble pops and they come back to you with YOUR MONEY and buy the assets back again at a substantial discount. Keep that in mind as this market bubbles higher – JP Morgan doesn't not sell his stocks because he's worried about the "tax consequences" – there are no tax consequences for the people who hold too long and lose all their profits.
