No. of Recommendations: 4
DXKSX is a 2x inverse of the 10-year Treasury note. It’s a bet that interest-rates will go up. I knew I was late to the trade. But I decided it still had room to run. So I put on a position last week at 5.77. Prices jumped the next day to 5.83, and I was whooping and yelling that I had nailed the move exactly right. I had gotten in, and the market had confirmed that the trade was correct. Then, of course, prices rolled back over again, and I did what I should have done from the getgo. I pulled a longer-term chart and checked out the price action more carefully.

Definitely late to the trade, right? But if the underlying fundamentals really are as bad for the US economy as it is being widely denied, then the Bernank won’t be able to prevent rates from going up, no matter how much buying he does. So the trade should be done. But I also hate it when prices move against me, and I’d be willing to bail and try again later if I really were too early. But take a look at DXKSX using a 6-month Renko chart. It’s obvious that DXKSX put in a bottom by doing a double test of support in late Nov and early Dec and then proceeded to walk its way up in a saw-tooth, advance-and-retreat, action-and-reaction pattern.

Alternatively, if a descending trend-line is drawn across the tops of the lower highs, it can be seen that DXKSX has broken through resistance. In short, however one wants to mark up the chart, there was plenty of technical justification for putting on a position that also had plenty of fundamental justification for doing as well. But just because the evidence favors doing a trade doesn’t the trade will work out as hoped. There’s no reason prices couldn't reverse and re-test the lows. But now look at a 3-month chart. What do you see? That prices advance about 6-7 ATRs and then retreat 2-3. (For an explanation of how Renko charts are built, pull your reference manual.) Anyhow, looking at the chart from left to right, you see the advance-retreat pattern happened three times before I entered last week. So the high-probability bet was the prices would do so a fourth time, and I sat tight, rather than panicking out of the trade. Bingo! Markets reacted to Obam’s speech and spending plans with the scorn and disbelief they should have, and they sold the 10-year note. So I’m back in the money on the trade.

Over the coming months and years, there’s going to be a lot of volatility around bond prices, and the moves up in interest-rates won’t be linear or without reversals. But I’m willing to bet that the secular bull market for bonds is finally drawing to a close and that the correct market side for long-term investors is now short. Traders, of course, can continue to take pieces out of the price action from either side as they can catch them.

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No. of Recommendations: 2
I don't know how long you plan to hold this but from their prospectus:

Important Information Regarding the Fund

The Direxion Monthly 10 Year Note Bear 2X Fund (the “Fund”) seeks calendar month leveraged investment results. The pursuit of calendar month leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the performance of the NYSE Current 10-Year U.S. Treasury Index. The pursuit of calendar month leveraged investment goals means that the return of the Fund for a period longer than a full calendar month may bear no resemblance to –200% of the return of the NYSE Current 10-Year U.S. Treasury Index for such longer period because the aggregate return of the Fund is the product of the series of calendar month leveraged returns for each calendar month. The path of the benchmark during the longer period may be at least as important to the Fund’s return for the longer period as the cumulative return of the benchmark for the relevant longer period, especially in periods of market volatility. Further, the return for investors that invest for periods less than a full calendar month or for a period different than a calendar month will not be the product of the return of the Fund’s stated goal and the performance of the target index for the full calendar month.

The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking calendar month leveraged investment results, understand the risks associated with shorting and the use of leverage and are willing to monitor their portfolios frequently. (Their bolding, not mine)


Total Annual Fund Operating Expenses(2)


As a result, over time, the cumulative percentage increase or decrease in the value of the Fund’s portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Fund’s underlying index due to the compounding effect of losses and gains on the returns of the Fund. It also is expected that the Fund’s use of leverage will cause the Fund to underperform the compounded return of two times its benchmark in a trendless or flat market. (bolding mine this time)


1.9% is a lot to pay for that risk. How much time decay are you willing to risk?
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No. of Recommendations: 2
1.9% is a lot to pay for that risk. How much time decay are you willing to risk?


Fair enough questions. Let's me address each separately, plus the questions raised by the sentences you bolded.

I know that fund expenses are Bogle's big thing. But his concern is a clear instance of the tail wagging the dog. If I had followed the advice to investors he lays out in his books, I wouldn’t be pulling in the money I am today (and have been the past dozen years). Yeah, I’d have tiny expense-ratios. But I’d also have tiny gross-returns. You gotta spend money to make money, and I don’t care what my expense-ratios are *provided* my returns more than cover them.

In trying to focus investor attention on expenses, Bogle is putting the cart before the horse. What is the single most important factor in investment success? Not the minimizing of the expenses needed to put on a position, but getting the timing correct. To paraphrase, a football coach, “Timing isn’t everything.It is the only thing.” And the second most important thing is 'timing', and the third most important thing is 'timing'. Timing is the make-or-break factor. Get that wrong, and I don’t care how cheap your expense-ratios are. You’re going to go broke or just make the crap money that Dalbar's 20-years studies of investor results clearly document.

This is the advice given to new traders. "First, figure out a way to get yourself at least occasionally profitable. Next, figure out a way to get yourself consistently profitable. Lastly, figure out a way to enhance those profits by becoming efficient about things like commissions and expenses." Yes, mutual fund expense-ratios do matter. But worrying about them comes after the investment strategy has been proven to be sound. That’s what has to come first, and that’s why I put on the trade without regard to the fund’s expenses-ratios. In fact, I didn’t even look at them, because they are irrelevant. What did matter to me hugely was reading the price chart and seeing where I could do an entry.

A question you didn’t ask --but should have-- is why I chose to use a financial instrument that only has end-of-day pricing and for which volume isn’t reported, instead an ETF equivalent or the futures contract. In other words, from a trading point of view, open-end mutual funds have some disadvantages versus exchange-traded products. You’re going to suffer a one-day lag getting in and out. OTOH, you can trade commish-free and, far more importantly to me, you can trade in fixed-dollar amounts. That’s my attraction to the instrument. I don’t care if I only break even or if even if I lose a few bucks. I’m trying to buy information, and I’m willing to pay the price for it.

What’s the info I’m looking for? Can a viable trading-system be built for open-end funds that don’t have short-term trading constraints? I don’t remember the exact numbers, but Direxion offers about a dozen. Rydex (now Guggenheim) offers about 80. ProFunds, around 60. Between them, it’s possible to trade any major market (US, Europe, China, LatAm, Japan, EmgMkts, bonds, currencies, commodities, oil, gold, etc.) and many sub-markets (Consumer Discretionary, BioTech, Semiconductors, etc.), and some of the major themes from both sides of the market. In other words, between the three companies, a very full palette of choices is offered.

Last Spring, I ran a quick experiment and made about a gazillion percent (annualized) a couple of 3-4 day trades. But the reality of my workday (and personality) is that I can only only one thing at time. I can focus on bond-investing, or I can focus on fund-trading. One or other. Not both, and last year kept me fairly busy. I don’t remember the exact numbers. But in 2012, I added over one hundred positions at a cost of roughly $200k. That’s small money to some in this forum. But it’s big enough money to me that I didn’t want to screw things up with distractions. Coming out the gate in 2013, I was still finding bonds to buy, and I was spending at the same pace. But now I’m ready to throw in the towel. Yesterday, I was in and out of the market in under ten minutes. There just wasn’t anything worth buying. This morning, I forced myself to look harder. But I didn’t like what I saw. And the pattern that has emerged over the past several weeks is that the good junk is getting even more expensive, and the trash is starting to roll over. A sea change is happening. The investing climate is changing despite the shouts from the bulls that Dow 15,000 and SP 1,600 are just around the corner. Well, they’re not. Ben can’t print enough money and he can't buy enough bonds to keep stock prices propped up much longer.

In short, it’s finally become to sit on my hands, so I don’t cause myself harm. I need to monitor my 300 some bond positions. But I also need to sit back and let them do their job. Meanwhile, underneath everything, everything is getting ready to go to hell. We’re at least a four months already into a global currency war. We’re many, many years into global wars, with Africa now becoming the latest hot spot. We’re decades into excessive borrowing and excessive spending globally. When the sand finally does hit the fan, the only way to continue to increase wealth will be by nimble trading from either market side. The underlying won’t matter. But the timing will. Those who intend to continue pulling more money out of markets (on an after-taxes, after-inflation basis) than they bring to them will need to have the ability and discipline to get in, and then get out. That’s ‘trading’, pure and simple. But it doesn’t necessarily mean ‘intra-day trading’, which is a gig I really don’t want to try to go back to.

Bond-investing has made me lazy. I like the leisure of being able to waltz into the market on my own schedule, take a look around, and then execute or not as I please. Scan-Vet-Execute. That’s been my paradigm, and it’s a comfortable way to put money to work, and it’s an easy, daily routine once one’s business plan has been written, procedures decided on, spreadsheets built, etc. In fact, it becomes so routine that it’s almost boring, which is A Good Thing. My bet is I can replicate the structure of that process with tradable mutual funds. Hence, my putting on a position in DXKSX was merely the first of the many experiments I’ll need to run.

How long will it be before I can support myself entirely from this new gig? (That is my measure of investing success. If you can't support yourself, no matter than you don't need to, from just your financial activities alone, you're just an investing hobbyist and no one anyone should take seriously, especially not yourself. "Fish, or cut bait.") How long before I turn a profit with this new gig is something I can't know. I do know that over a dozen years ago, when I was trying to break into bond-investing, I never imagined I’d be able to support myself twice over from it. But it happened, and I see no reason why, with the same sort of effort, I couldn't do it again with another instrument.

Why do it? Why take on a new investment challenge? As Sir Edmond Hillary said of his climbing Everest, "Because it's there, just asking to be climbed by them that see a possible path to the top, who have the courage to accept the risks, and the freedom --if they choose-- to walk away if/when they realized they've failed." There's nothing admirable about crazy, compulsive risk-taking. But a sensible, carefully-considered expedition? That's worth doing, even if the downsides could be serious. I don't ride a bike without wearing a helmet. I don't put on a position without setting a stop. I don't launch investment experiments without knowing where my exit points will be. But minor junk like fund expenses or benchmark shortfalls? Not even worth considering at this stage of the exploration.

Thanks for the question.

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Ignore my whining in the previous about how tough the bond market has become. The shopping went well this morning, and I added to an exiting position. The game isn't easy. But it's doable, and that's all a market professional should care about. "Can it be done?"

This isn't to say that I'm not scrambling as fast as I can to rotate capital and research efforts away from bond investing and toward other investment opportunities. But I've got too much money in individual bonds, and the bond market has been too kind to me for too long, to ever fully abandon the gig. As long as I can continue to make wages, I'll fish the fixed-income waters.

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DXKSX will close down today. So I added, because this is a long-term bet. As for some short-term stuff, I did a quick trade today on NUGT, just because it had become so over-sold yesterday.

The two asset-classes are driven by the same fundamental factors. Hence, it makes sense to pair them.
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