When one is feeling long or short on the market is it better to buy the QID/QLD (or the other ultra ETFs they have) or short it?
Example: I think the market is going down I can either buy the QID or short the QLD. Which one is better?
I enjoy these kinds of questions because there is no right answer - there is, of course, Marlyn's answer and that you can take or leave at your discretion.
First there is no right answer. I looked up the short interest for both of these puppy's and was astounded to find that, yes, folks are shorting QID, not much but they do have shorts against a "shorting" ETF. Then I saw that folks are also shorting QLD - again not a lot but the interesting thing is there are three large months that folks are short - Last July, November, and March 2007. I don't know about you but I seem to remember that there was a mini-boom from July to December followed by yet another mini-boom from November through the end of the year - so if we are looking for a contrary signal - have we found it? Only time will tell - but if it turns out the larger than normal short interest in QLD presages a boom - you heard it here first.
Now let's get back to the question. I don't short for the simple reason that I have a working set of tools for the long side, they serve me well and golf season is upon us again. I'd rather take dull or down days off than look for short opportunities so I can bat a little white ball around the course.
But I do like the idea of the QID/QLD as a pair and I took a look at some methods where you would buy them both simultaneously. What? Yes - just like some crafty old hedge fund manager type guy you would buy them proportionally to the direction of the market - I used simple numbers - 5 and 10 - for the demonstration but I'm sure you guys can work on it and get some optimums.
But here's what I did. If my sense was that the market was going up then I bought 10 QLD and 5 QID lots. If I sensed the market was turning I switched the order around. I did this in such a manner that you could get the sense of the market by 3 P.M. of any day and be positioned for the next day before 4. I used NewMoMo but you could use anything - including RSI(2) or ATR(10) or ATR(4) or a set-up or what ever you chose.
Here is a chart going back to 26 December through yesterday of the combined returns using the method above - There were 9 market turns in the period -
Do I recommend this - not on your life buster and if you use it and blow out your account zigging when you should be zagging you didn't hear it here. Actually that's the beauty of the approach - you won't blow out your account.
Now would you make as much as you would if you just went one way and not the other - no - but the method I've proposed is really low risk and if the market takes off in either direction you could always cancel one side of the trade or the other until it settled. Note that the chart reflects the fact that I held both sides through the entire test period.
So think about it - work on it on your own and maybe you will come up with the poor man's magic hedging system. If you do and you start selling it to unwary bystanders and you start making a small fortune off it - remember to call it by it's correct name - Marlyn's Trade.