Friday, September 19, 2008

It has begun

The first leak has sprung in the ETFs that use derivatives. Proshares' short and ultrashort financials ETFs (SEF and SKF) stopped trading for 2 hours this morning.

Proshares has made an ominous announcement about these two funds, saying that they are
not expected to accept orders from Authorized Participants to create shares until further notice. Unless notified otherwise, shares will be available for redemption by Authorized Participants as normal. The shares of these ProShares are expected to trade in the financial markets today, but may trade at prices that are not in line with their intraday indicative values.
This sounds to me like nobody will be able to buy any new shares, but that selling is still allowed. The important point is that this probably won't be the last Proshares stoppage.

That settles it for me. I'm selling the remainder of SDS (only 17% of my account) at my first opportunity on Monday. The Grizzly Short Fund (GRZZX) is my official bear market fund for the time being.

7 comments:

Anonymous said...

Jody,
What is your opinion concerning holding Put Option positions on an ETF (specifically SPY)? I sold some positions (at some loss) when the market recently zoomed. I have not noticed any liquidity in the options markets.

Thank you,

Ken

John from Colorado said...

Jody;
I actually looked at buying SKF first thing Friday morning due to the huge drop (SKF at ~$88). I couldn't get the buy to take since TD Ameritrade's server was overloaded. I normally don't day trade but I thought Friday's triple witching was an opportunity, plus the announcement of no short selling for many financial stocks looked to create a situation where financial stocks wouldn't be fairly valued in the short run. I think I was right but couldn't execute. Anyway, I will be very interested in what your indicators are showing this next week. Could we be looking at a bear rally with a great buy opportunity (short) in the relatively near future? Any thoughts on how the government's actions will affect earnings for Q4 2008? I wouldn't expect further write-downs in Q4 by the financials but it seems that overall earnings will be quite lousy. Thoughts? Finally, I wanted to thank you again for your insight during the past couple weeks. It helped me to maximize my gains.
John from Colorado

Jody said...

Ken,

This is the most confusing set of data I've seen since I started following the stock market. The only thing I'm willing to predict with better than 50-50 certainty is that a short-to-medium term rally is probably in our future. Now, if the expiration dates on your options are in the distant future, then you just might get your lower prices eventually - but I can't guarantee that right now.

Jody said...

John,

Although it's been difficult to do this past week, I have to keep thoughts about government actions out of my mind so I can focus on the few things that I actually understand. I am absolutely baffled by the news this week, and I think the interventions have temporarily scrambled my indicators. For the time being it looks like I'm going to hunker down in cash and wait for some kind of clear *natural* market signal.

Given how lost I feel right now, it's hard to believe that I offered any good advice recently - but thanks for your kind words nonetheless.

Anonymous said...

Jody,
In my previous post I meant to say that I had not noticed any "problems with liquidity in the options markets". (my editing mistake)

I agree with John - your advice has been great. Our government changed the equation - now we have to review and adjust our strategies.

Thanks again,

Ken

Anonymous said...

Here is a link that explains the reasons why SKF and SEF stopped selling new shares on Friday. The concern was that because of the short selling ban, the demand on these funds (that actually don't short trade) would be too big.

http://biz.yahoo.com/ms/080919/253823.html?.v=1

Oleg

Jody said...

Thanks Oleg. How ironic that the government's attempts to steady the market actually created the first problems with these ETFs!