ALL ELSE BEING EQUAL

I know generally when this phrase is used to talk about something it usually means that all else is not equal. Here is a prime example of that. The QID which is an inverse ETF should essentially sky rocket on a day like we had last Thursday, yet we see a death spike down intraday. How can this be? Isn't this a vehicle designed to protect against downside movement? If we had the foresight to have seen this coming shouldn't we have been able to profit from it?

First of all, I would agree that in this instance the trades executed on the dip should have been busted by the exchange. For this to trade way down should be impossible and nobody should have been able to buy this that low during a monster down day. The price should have traded straight up all day long. Electronic death spikes are a problem in the markets and we are seeing more and more of them. In the old days where people executed the transactions, these types of things did not happen. I see no way of this type of trading being completely unwound. ETF's are in general liquid if you look at the total volume in a day many of them trade, but they do not trade intraday in a very liquid fashion. This is especially true during a volatile period like last week.

One thing we do want to keep in mind, and it is now more true now than it has ever been. The powers that be do not want people to be able to make money of declines in general. Remember that blockhead from Michigan grilling the Goldman Sachs guy. For the most part they want to rig everything to always increase in price. Unfortunately, it it this very "fixing" of the game that causes huge imbalances which create these big vacuum moves where values revert to the mean. Artificially lifting the market almost every day with last hour buy programs like the PPT has been doing pushes values way beyond where they should be. The rubber band can only stretch so far before it reacts.

Yes they have given us these vehicles to trade that should allow us to profit if we use them properly, but they are inferior to futures. I know alot of people want to avoid futures because they think they are more risky. This is just false. Risk comes from liquidity, and there are not many things more liquid than index futures. ETF's are not even in the same conversation as far as that goes. How can something that is more liquid be more dangerous?

If you insist on playing the vehicle that is less liquid, you have to take the good with the bad. There are limitations and you have to deal with them. In this above case, in the end the right thing was done which is a rare case nowadays with our government. This ETF ultimately rose and the erroneous trades that should never have occurred were invalidated by the exchanges. This is a good thing not a bad thing. The best thing you can do is adjust your size accordingly when playing these ETF's. They have limited trading hours, and often things happen outside of when they are open, so you will have both bigger wins and bigger losses. If you look through the stats over the last several years, you will find that the majority of the net moves in the indexes have occurred during non-us trading hours. As a result, relying on vehicles that trade primarily during the hours other than those where the moves are happening, is very risky to me.

I take half the size in these trades as a result of that due to knowing they are in reality not very liquid vehicles. For those who wish to avoid futures, that is the best thing for you to do. Also, mentally accept the limitations that are here. If you don't like them, open a futures account.

Just like Ackroyd said in Trading Places just before they went into the pits to whack the Duke Brothers, "Fear, that is the other guys problem."