Late Day Drop Smells of Trader Shenanigans

Of course we have no proof of anything, but todays late day drop probably wasn’t the work of you and I unloading our ‘vast’ holdings and probably was the work of high frequency traders and other traders scalping off the days gains.  While we were under no illusion that the early day 400 point jump would totally hold we were surprised with the speed and extent of the drop.  In fact while we typically watch the markets pretty closely during the trading day today we decided to run some errands an hour before the close, figuring the Dow would end up around 200 points higher.  Now the fact of the matter is that we would not have made trades during that last hour no matter what happened, but the quick move down reminds me of earlier times when Wall Street pranksters worked hard to destroy what little credibility they had with the investing public. John Q Public is already mostly sitting on the investing sidelines–more moves like we have seen in the last few days only serve to discourage them more.

Earlier in the day today all of our portfolios had significant gains from yesterday and even with the last hour drop we maintained some of our gains–so all in all the day wasn’t too bad. We have maintained our position in the Proshares Ultrashort SP500 (ticker:SDS) which has been a great comfort during down days. This ‘hedge’ has provided over $7,000 in profits and singlehandedly kept us in the black YTD.  The problem with a hedge is simply – when do you remove it?  There is always a cost–when markets go up you lose money on the hedge, which doesn’t allow you to take full advantage of gains. Certainly there is no way to ever know for certain when it is wise to maintain a hedge and when it should come off–so we are watching closely and may remove 1/3rd of the hedge before the week is out. If we get another 200-500 Dow point drop we will definitely remove 1/3rd. The reason we will do so is simple–on a historical basis we believe the equity markets were 10-15% overvalued at their peak and now they are getting close to ‘fair value’.  We reserve the right to change our minds.

We are watching another REIT as a potential buy.  Lexington Realty Trust (ticker:LXP) is a diversified REIT with office, industrial, retail and other properties.  Brad Thomas determined it was a buy back in May–at $9.07–it is now $7.90 with a 8.6% current yield.  We respect Brads’ fundamental analysis–just not his timing.  His May article is here. 

Beyond the above we don’t have other plans for the balance of the week–wait and watch.  Be patient.