Dear Prudence

It's been another nice day for equities, and the S&P 500 is rapidly approaching the critical zone at 1490 - 1500. Amazing as it seems, the S&P has already retraced half of its peak-to-valley trough, which took the better part of six weeks, in a matter of four days.

That, my friends, is a market due for a rest, and the looming resistance area offers an obvious stopping point. Macro Man therefore sells 460 ESZ7 contracts at 1485, which hedges half of his beta plus exposure to equities. A quick dip back down to 1440-1450 is eminently possible, particularly ahead of next week's payroll data, and it would be churlish to pass up the opportunity to hedge.
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Anonymous
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November 30, 2007 at 8:21 PM ×

why not hedge through shorting financials?it seems to me they will keep 'outperforming' the sp500 in the downside for quite while since they havent done what they should in terms of setting aside loan loss reserves, cutting dividends, write offs
its more capital efficient since they have inbuilt leverage

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Macro Man
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November 30, 2007 at 8:28 PM ×

From a more medium term prespective, you're probably right...though some of the financials have come a loooongggg way already.

But the strategy here is highly tactical in nature (your "accusation" was right in this case, Cassie), so ease of execution and matching apples-to-apples made SPX exposure the obvious route to go down.

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2and20
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November 30, 2007 at 11:52 PM ×

re: anonymous,

whilst shorting financials might sound like it makes sense, as MM says they have come a long way. Despite being majorly bearish on the long-term fundamentals of mortage lenders, I still dipped my toes into Citi/CFC and WaMu this week and was rewarded with some crazy quick returns today...nearly 20% on CFC!! And yes I sold the lot on the open!

Long-term the market trades on fundamentals, but short-term stuff can move too far too fast.

Personally I think US Small-cap could struggle through a recession so have been shorting the Russell 2000 lately instead of the S&P (since financials seem oversold) and the DOW (since the weak dollar helps these companies with a high international exposure).

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Anonymous
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December 1, 2007 at 2:13 AM ×

http://bp0.blogger.com/_Lsl3ZOXvc0s/R0_BaJsvOvI/AAAAAAAABSQ/J7-o3FEerbU/s400/Ben_third_cut.JPG

Weekend Jacuzzi at White house

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OldVet
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December 1, 2007 at 4:20 PM ×

right on 2and20. I trade for position 3-6 mos out, but really enjoy the shorter term maneuvering. More than once I've seen a longer term move telegraphed on this and other pages. Thanx MM.

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Anonymous
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December 4, 2007 at 3:23 AM ×

mm do you think that there may have been some window dressing at some banks prop desks? Given that it was the end of the financial year some traders may have wanted to show better performances.

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Macro Man
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December 4, 2007 at 5:41 AM ×

I'd be surprised, to be honest. I think last week's rally was about the Fed changing its hardline stance and short-covering, rather tha window dressing.

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