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Reduce equities, Keep some cash, and Hedge.

Feb 15 2008

Reduce equities, Keep some cash, and Hedge.

When the market is in a down trend it makes sense to balance not only your stocks by sector, but the amount of cash you have and the amount of hedging in your account. I am currently 25% in cash and 25% hedged with Dow Jones 30 Inverse by Pro Shares (DOG) which matches the inverse of the Dow Jones 30 dollar for dollar.

I am not a big fan of the Ultrashort ETFs as they provide too much movement when the market does have a rally of a couple of days or a week. These ETFs provide double the inverse of a particular index or sector. So when the Nasdaq rallies 4% over the course of three days like we say recently, the Ultrashort QQQ (QID) would lose 8% of it’s value. That is too much movement if you’re not watching the market daily and/or have high commissions to pay when you move in and out of positions.

ProShares offers as many single inverse and they offer Ultrashort/double inverse ETFs. http://www.proshares.com/funds?products=98616&fundType=MarketCap is a listing of all the single inverse ETFs that you can add to your portfolio to hedge against downside movement when the market is in a negative chart formation. Short QQQ (PSQ) and Short S&P 500 (SH) would be my recommendations after the Short Dow30 (DOG).

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