The Trouble with Hedging

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The market simply cannot make up its mind. Perhaps the powers that be simply want to bore traders to death so they don't have to worry about what will happen once the QE2 program, dreamed up by that colostomy bag of a man, Benjamin Shalom Bernanke, runs dry in a few weeks.

I have recently kept things pretty simple in my portfolio, with:

+ An absolute mountain of small short positions (dozens upon dozens);

+ One or two large long positions to balance things out

My hedging has done nothing but harm lately. Because of the whipsaw nature of the market lately, the only meaningful losses I've suffered are – ironically – from the very long positions acquired to protect me. Today was no exception.

Take a look this this chart of recent activity on the ES…….

0525-frustration

You can imagine market participants reacting at these movements in real time:

(1) The bears are excited that the market is starting to steadily move lower;

(2) Then the bears get shoved aside, and the bulls get energized that the market is forming a beautiful basing pattern, preparing to launch higher;

(3) And then the bulls get kicked in the teeth while the bears thrill at recent lows being taken out and a wonderful late-night drop (which regular equity traders really can't exploit, since only a tiny percentage trade the ES markets);

(4) Then the bears get smacked upside the head as the entire drop is reversed and the market explodes higher, thrilling the bulls;

(5) And then the bulls have their eyes poked with a limp-wristed selloff near the day's end, giving the bears some renewed hope.

Suffice it to say, this market is pissing everyone off. I'm no exception. If putting up a sign saying "Price Pays" near your trading workstation could save you from the above, well, God bless you.

My core disposition toward the market is based upon the marvelous topping formation in the Euro, which I think will provide the badly-needed wind at the bears' backs in the coming weeks.

0525-eur

 

Of course, the distinction between the FOREX and equity markets is quickly becoming meaningless, as correlation approaches 1.0. We might as well just all become FOREX traders and not bother with anything else.

0525-eurcompare

In any case, I think I'm going to give up on large hedge positions for now. If I want to reduce risk, I'll simply lighten up, which is precisely what I did today. My exposure is now only 42% of my portfolio, down from about 90%. Getting jerked around up and down gets really, really old, so I'm adopting a new tack.

That's it from me for the day. See you in the morning.