Author: Brendan Ruchert-Dixon
Covestor models: Alpha Trapper and Beta Blocker
Disclosure: Short FAZ, FAS
In my January report I stated that I would remain “cautious and neutral” heading into this year. For the first quarter of the year, that stance has led to under-performance during a major rally. Obviously I did not expect it to be as strong as it has been, but I recognize that markets can be unpredictable in the short term.
In the medium term, my concern remains regarding the deleveraging of the developed economies. There are still quite a few shoes to drop. Portugal is well on its way to becoming the next Greece, Spain has huge structural problems, and Japan’s gigantic debt grows larger every month.
The U.S. economy has been stronger lately, but are we strong enough to withstand all the potential shocks out there, given our own need to cut deficits? Time will tell, but regardless of what happens, I doubt the ride will stay as smooth as it has been lately.
My one trade this month, a small short sale of Direxion Daily Financial Bear 3x Shares (FAZ), seems counter to what I just stated above. However, I felt it necessary to partially hedge my larger short position in Direxion Daily Financial Bull 3x Shares (FAS), which has risen substantially this year and could get out of hand if I ignore it forever. I opted to sell more FAZ rather than buy back some FAS because I expect future volatility to cause both to lose value.
