The world hates shorts
Back in March 2015, I had a trading idea. Today, I'd like to report its results.
My big idea back then was to buy and hold UDOW, a 3x ETF which tries to give thrice the daily returns of the Dow Jones Industrial Average.
So, if the DJIA moved down 0.7%, UDOW would move down roughly 2.1%. If it moved up 0.2%, the ETF would move up roughly 0.6%.
My thesis was two part-
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that the economic recovery was still gathering steam and the top of the market was still some ways away
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Due to SEC rule changes, a huge cratering of the DJIA was basically impossible.
More on the second bullet point first. The SEC, in response to volatility in the market and incidents like the Flash Crash, mandated that trading would be halted for any ticker which moved down more than 10% intra day. So, if AAPL, now trading at ~$150 were to gap down to ~$135 within a single day, trading in AAPL would be halted immediately.
This rule works to smoothe out any fall in the market. The worst enemy for a 3x ETF is a huge one-time fall which decimates your position in one fell swoop. That happenstance is unlikely now that the SEC has basically mandated soft landings.
Yes, you could continuously lose money in a monotonically falling market but that's where the first bullet point came into play.
We have basically been in a rising market for the last 9 years. It's the opposite of a monotonically falling market.
As for the results: I bought UDOW in March 2015 at roughly $72. Today, its trading at $116 for a roughly 60% gain. In the meanwhile, the Dow went from ~18000 to ~21000 today for a gain of ~17%.
Is this a good long term strategy? I don't know. You can only look at the data at hand and make educated guesses about the future. My guess is that since the SEC had done away with sudden huge drops, structurally, US indices are likely to deflate over time rather than fall off a cliff. Based on that idea, I'm prepared to let UDOW ride for a while.
Starting Oct 2017, I'm going to keep a running record of the performance of my UDOW position here.
Oct 2017 Edit: My UDOW position is now up ~104%