How and Why I Use Short Index Funds

By Andrew Nyquist
Let me preface this article by saying that I have been actively investing for a long time, so please understand that using index short funds is for experienced professionals and not your average investor.  That said, I have also been actively investing long enough to know that markets and stocks do not go up (or down) in straight lines.  Translation: nothing is guaranteed.  So many people now days want guarantees in investing (and life), but that’s just not how life rolls.  Furthermore, I think many get caught up in their own emotion and impatience when dealing with money, and this increases the liklihood of being let down when their ideas get too rose-colored and don’t work out according to plan.

It is the expectation of something great (or devastating) that catches investors leaning the wrong way every time.  And it is around these emotional, “all-in” times that I decide to hedge or go against the grain.  And in an extended up market, I start to look at short index funds for a hedge and/or short term trade.  Simple as that.  Again, short term trade and/or as a hedge.  I’m not looking to try and ride out a multi-week pull back and make a fortune.  Heck, I’m not really one to short stocks in general (just not my forte).  What I am most interested in is either a) protection for current long positions and/or b) making a quick dime on a pullback.  It’s all about protecting my hard-earned money and investments by managing risk and playing the unfolding technical odds.  And, no, not the Vegas odds.  Indicators and technical analysis provide me with clues when markets or stocks are getting overbought and/or close to important areas of resistance (for more on this, read Anatomy of a Trader, Part 3 of 5: Vision Quest).  And it is in these areas that I like to layer out of long exposure and into short index funds.

I’m sure many of you have seen my technical charts posted under the title/tag Chartology.  If not, bookmark the aforementioned link and push yourself to research and learn something new).  You can also search chartology on the site as well.  The charts may seem foreign to the average investor, but if nothing else, block out the stuff that’s over your head, and revert to learning more about simple technical analysis metrics like trend lines and support areas.

Currently, I am roughly 30% short index funds (SH and SDS in the S&P 500 index family), and have lightened up on long exposure.  My break-even price on the combined SH/SDS funds equates to roughly 1305 on the S&P 500.  And if the market pushes higher today/tomorrow (as I expect it to), I may increase my exposure.  Again, this is a short-term trade and I will consider taking this investment off if the technicals change (see my recent Market Update).  Note additionally that this is separate of my view of individual stocks/sectors – this is no longer an “all one market.”  Some short index funds include SH (short S&P 500), DOG (short Dow30/Dow Jones), and PSQ (short QQQ/Nasdaq 100).  Double shorts, like the SDS are available as well for certain indices.

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Position in SH and SDS at time of publication.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of his employer or any other person or entity.