Normally when I bash out a Blog I have some sort of plan scribbled down on paper to help get my thoughts aligned and half sensible. However, tonight I was making a cup of Tea (one of about 300 I usually slosh back each day, not to mention the Coffees), and thinking about some discussions on Twitter and it struck me there was a Blog to be written about the pain I am suffering from my FTSE100 Short Hedges which are certainly testing my resolve !!
I am sure many Readers have seen my huge Blog about Hedging and have a reasonable understanding of what it is all about - if you haven’t had the misery of reading it, then click on the ‘Category’ ‘Hedging’ and you should find it.
My Hedges
If you look at my ‘Trades’ page on the Website, you should be able to see that I put on lots of Short FTSE100 Spreadbets and a XUKS FTSE100 Short ETF earlier in 2016 when things were looking pretty bleak and I was already concerned that this would be a tough year because of the Brexit Vote. The most frustrating thing for me was that I missed putting some Hedges on just after Xmas when there was a very clear ‘Sell’ Signal given by an Inverted Hammer Candle etc. and I remember tweeting out that I thought Indexes were about to fall. However, my view was that around Xmas and New Year the Volumes are light and that any drop would be small and not worth bothering to Hedge - it is the Lesson from this that any clear Sell Signal is just that, irrespective of Volume, and it would probably be wiser to at least put a small FTSE100 Short on to Hedge a bit of Downside out. At the time I put most of my Hedges on, Markets were in a right mess and Commodities in particular were very broken and Oil was just dropping like a Stone. Of course I considered the Risk that I was putting Hedges on right at the Bottom but these things are very difficult to predict and my overall driver was to remove the Downside Risk - it is Downside Risk that kills Portfolios, not Upside Risk (unless you have Shorts on that are too big !!). At the time of placing my Shorts, I fully considered the various Scenarios and ran several ‘What if?’ Scenarios with regard to how my Portfolio would be impacted if the Shorts went against me and rallied 600 Points or whatever. I always do such Scenario Planning and I really recommend it as a way of thinking about how things can pan out when they go against you - this is very important when Hedging using Leveraged Spreadbets as they can munch up Cash quickly if they go the wrong way. After I had put a few Shorts on, I was carefully monitoring the Performance of my Portfolio every day and trying to weigh up how much more Short I should put on to make sure I had very good coverage in case Markets started to Drop - as I did this monitoring, I was pretty sure I needed to add to my Shorts and that is what I did. Needless to say, that seemed to work pretty well in recent weeks and my Portfolio was fairly static in its Value with the Longs and the Shorts offsetting one-another and keeping a nice Balance - so it was like I was 100% Cash and ‘Market Neutral’. However, as these things always do, in recent days and last week also, the ‘Balance’ seems to have gone awry and I am finding that my Shorts are losing Money hand over fist but the Longs are not fully offsetting this - it is a right pain !! I think the Lesson here is that it is better to be a bit light on the Shorts than to try to Hedge exactly and end up getting it a bit wrong like I seem to have done. In terms of pure monetary value, my Shorts are about 65% of my Longs so you would think that there would be reasonable balance there - but in reality it is not working so well. The problem seems to be caused by the FTSE100 Rally being driven by only a few Sectors in the main - and they are rocketing. It seems to be Banks and Miners (and Oil) that are shooting up and this means that my Long Portfolio, which is a mix of stuff both in terms of Sectors and Market Capitalisations, is not offsetting the Shorts because in aggregate my Longs are not moving up as fast. I will add here that when I talk about my ‘Longs’ I am not including my Income Portfolio which I do not monitor on a Daily or Weekly basis - in reality, this will have done quite well in recent days and this will be helping me a little bit. Where does this leave me The beauty of Low Interest Rates is that keeping FTSE100 Short Spreadbets running over long periods is not all that costly - this means I do have time to exit the Shorts at an appropriate time. Markets have had a superb rebound since the malaise of January and April is notoriously a very strong month - second only to December. I am already sensing the mood of people on Twitter changing and everyone seems to be a Bull again and getting stuck in on the Long Side - this makes me think this is getting towards the end of the Rally - and with the Brexit Vote on the 23rd June, it’s hard to see the Summer being a good time for Stocks. My main reason for Hedging my Portfolio this year is because of the Brexit Vote and it is fair to say that the Macro Economy worldwide looks rather ropey - so I am happy to keep my Shorts running, but I would prefer it if my Stocks offset the Shorts a bit better !! It’s a weird situation because by being Net Short to a small extent at the moment, I am in effect taking Losses now that should be reversed once Markets decide to drop again - of course, my worry here is that on the way up my Shorts are probably oversized, but on the way down they might not be big enough !! In other words, my Longs might fall faster than the FTSE100 falls - this is unlikely but it might happen and that would be really irritating !! There is something for Readers to think about here as well - many will have big grins on their faces and be really pleased with the recent Gains they have made - but it is vitally important to lock in some of these Gains by Selling soon - this Market will not rally forever - they never do. It would be really annoying to watch your Portfolio run up in Value only to see it all evaporate again when the Market Mood changes - make sure you Topslice or whatever you do to lock in some gains. Dare I say it, you could even Hedge a bit !! I have said for some time that this is a ‘Traders’ Market not a ‘Long Term Investors’ Market - this is precisely what I mean by the importance of making sure you bank some gains. Don’t get greedy. Conclusion It was pretty obvious to me that April could be a strong month and holding my Shorts could be painful - but it is very difficult to know exactly when the Rally will end and the simple fact that I am feeling distinctly uncomfortable makes me think the Market is getting near the time to be Selling. As I have written in my usual Index Blogs, I see the Brexit Vote as putting a big downer on the Markets and the usual “Sell in May and go away…..” adage will probably be proved true this year as it almost always is. There are a lot of people sat on some lovely fast gains and they will not need much provocation to make them hit the ‘Sell’ button. From a Technical Viewpoint, there is a lot of Resistance coming up soon on the FTSE100 and on the Oil Price chart - it will be very difficult for the Markets to wade through this when Summer is just around the corner and we are about to leave the EU. Needless to say I will keep looking at the Indexes and doing some Charting Blogs to investigate how things develop in coming days/weeks. So, I am going to grin and bear it and keep monitoring my Portfolio Value and assessing the likely impact if the Markets continue to rise - the beauty is that my Portfolio is not bleeding too much as the Longs are doing some good work to help reduce the pain. I have actually considered adding a little more on the Short side but I think this is very much a last resort and I can only do this once my certainty level is extremely high - to add to the problem would be silly really. If Markets do not drop prior to the Brexit Vote, then it is extremely likely that we will have another big Sell-off in the Autumn around September/October and I will be able to escape the Shorts then if need be. It is not an ideal situation, but I think closing the Shorts now would be a huge mistake as you can guarantee that if I did this, then the Markets would fall off a cliff about 2 seconds after I hit the ‘Close’ button !! Hey, it’s not easy being a WheelieDealer you know !! Cheers all, happy hunting, WD
10 Comments
Zyg Suzin
13/4/2016 11:58:13 pm
Hi WD, I found your blog v. Interesting but that is not unusual as all of them are interesting. I have a very much similar approach to as that I hedge rather than do a massive a massive sell or top-slice! Though I did a bit of selling to lock in profits.
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WheelieDealer
15/4/2016 11:10:29 pm
Hi Zyg, thanks for the comments on the blog. Your strategy to trade Indexes on the Long side a bit seems to have worked very well - as you say, it takes practice and you will get stopped out now and again.
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catflap
14/4/2016 07:24:24 am
Thanks for the update and frankness over your hedges. Its really helpful. I glad i read the warning on your website and didnt follow your "advice"!
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WheelieDealer
15/4/2016 11:15:34 pm
Hi catflap - thanks for your appreciative comments - I am very happy to open up about when I cock stuff up because it is very helpful to force me to think about such things and it acts as a Stick to beat the Lessons into me !! As you say, no one should take my stuff as 'advice' and my Website and stuff should be used to make people think about how they do things and I am sure my thoughts and results are a useful measuring stick that is not usually all that available. Many 'Gurus' tend to cover up their mistakes I suspect and they lack the openness and some are so good it is useless us ever trying to emulate their achievements. We are not all Warren Buffett (sadly)....
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Ed
14/4/2016 02:40:08 pm
I think you have been a bit unlucky and I am struggling to see a reason for the recent rise in the markets. A rush to buy is generally followed by a rush to sell. I wimped out and sold my XUKS last week but the higher the markets go the more I will think about buying back again. Does seem that the UK market is not as strong as the others though, so a few polls might see a drop over the next few weeks.
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WheelieDealer
15/4/2016 11:19:00 pm
Thanks Ed, it does seem like the worst possible scenario for my Hedges has actually played itself out and made things unpleasant for me - as you say, sharp runs up tend to be followed by runs down so chances are I will escape without too much pain in the end. It is not ideal but that is how it goes sometimes. It does strike me that the Rally is only in a few Sectors and there is no breadth - this means any Pullback could be sharp. With Brexit Vote coming up it is hard to see much more Upside in the short term.
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BenS
15/4/2016 06:12:39 pm
Hi.
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WheelieDealer
15/4/2016 11:23:21 pm
Hi Ben, I remember us discussing this in the Boozer - your stance to 'hedge' via Cash and Gold has worked very well. It certainly doesn't seem like a Market to be buying with any rashness except for the Short Term Traders - hopefully they will get out in time to bank the fast Profits.
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JonH
18/4/2016 05:11:30 pm
I find that very often I get things right but at the wrong time. So I sell too early or too late, And in this case I bought XUKS FTSE100 Short ETF when the market was at its lowest with dire predictions of where it might go. I did not buy a lot and have since sold half. I have also sold half of my house builders seeing how they have recently fallen through the 200 day moving average following a very good run.
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WheelieDealer
18/4/2016 09:40:50 pm
Hi Jon, Thanks for your thoughts and comments. I think the timing thing is a big issue for most of us - it is very difficult to get spot on and the only partial solution seems to be to Scale-in and Scale-out of Positions. Interesting you are using the 200 Day MA rule - I know a lot of 'Traders' who use a similar technique, or the 10 Month MA rule.
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