Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.


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Wow, the market has gone from really exciting to deadly dull within the span of just a couple of days.

Even looking at the after-hours action. there's nothing going on. Nothing's really up; nothing's really down; it's like everything has found its equilibrium all of a sudden.

As for my own positioning – – for the first time in about 300 years, I have more long positions than short positions (33 versus 23), but these longs are intended to be bordering on one-night stands instead of long-term, committed relationships. More precisely, I have definite views as to how much the indexes will recover (they've gone a good chunk of the distance already………….) and I may well be 100% short by early next week.

In the meantime, I am pretty much market neutral, which just about guarantees I'm not going to make or lose much of anything until things are stretched to the upside again (at which time I plan to become SuperBear). I think the Russell might have another 2.5% – tops – of upside, at which time I am going to short everything which isn't nailed down.

So expect things to be relatively mellow on Slope for a little while. That's it from me for today. Good night.

Hedging Update – Stocks

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In order to cover more stocks and ETFs this week, I thought I'd break up the hedging update into two posts — one primarily for stocks, and one for ETFs. The table below shows the costs, as of Tuesday's close, of hedging 10 widely-traded NYSE stocks and 9 of the 10 most widely-traded Nasdaq names against greater-than-20% declines over the next several months, using optimal puts.


For comparison purposes, I've also added the costs of hedging the SPDR S&P 500 Trust ETF (SPY) and the SPDR Dow Jones Industrial Average ETF (DIA) against the similar declines. The Nasdaq 100-tracking ETF PowerShares QQQ Trust ETF (QQQ) is also included, as it was on Nasdaq's most active list as of Tuesday. First, a reminder about what optimal puts mean in this context, and why I've used 20% as a decline threshold, plus a note on why there were no optimal puts available for one of the Nasdaq stocks.

Optimal Puts

Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. As University of Maine finance professor Dr. Robert Strong, CFA has noted, picking the most economical puts can be a complicated task. With Portfolio Armor (available on the web, and as an Apple iOS app), you just enter the symbol of the stock or ETF you're looking to hedge, the number of shares you own, and the maximum decline you're willing to risk (your threshold). Then the app uses an algorithm developed by a finance Ph.D to sort through and analyze all of the available puts for your position, scanning for the optimal ones.

Decline Thresholds

You can enter any percentage you like for a threshold when using Portfolio Armor (the higher the percentage though, the greater the chance you will find optimal puts for your position). The idea for a 20% threshold comes, as I've mentioned before, from a comment fund manager John Hussman made in a market commentary in October 2008:

An intolerable loss, in my view, is one that requires a heroic recovery simply to break even … a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally). 

Essentially, 20% is a large enough threshold that it reduces the cost of hedging but not so large that it precludes a recovery. When hedging, cost is always a concern, which is where optimal puts come in.

How Costs Are Calculated

To be conservative, Portfolio Armor calculated the costs below based on the ask prices of the optimal put options. In practice, though, an investor may be able to buy some of these put options for less (i.e., at a price between the bid and the ask).

Why There Were No Optimal Puts for LVLT

In some cases, the cost of protection may be greater than the loss you are looking to hedge against. That was the case with Level 3 Communications (LVLT). As of Tuesday, the cost of protecting against greater-than-20% declines in that stock over the next several months was itself greater than 20%. Because of that, Portfolio Armor indicated that no optimal contracts were found for it.

Hedging Costs as of Tuesday's Close



Cost of Protection (as % of position value)

  Nasdaq Stocks  
(CSCO) Cisco Systems 5.84%**
(LVLT) Level 3 Communications No optimal puts at this threshold
(MSFT) Microsoft 2.35%**
(INTC) Intel Corporation 3.71%**
(MU) Micron Technologies Inc. 19.3%**
(QQQ) PowerShares QQQ Trust ETF 1.64%*
(ORCL) Oracle 3.02%*
(DELL) Dell, Inc. 4.72%**
(CMCSA) Comcast Corporation 3.34%**
(YHOO) Yahoo! Inc. 7.24%**
(FITB) Fifth Third Bancorp 5.93%**
  NYSE Stocks  
(BAC) Bank of America Corporation 6.94%**
(F) Ford Motor Co. 4.69%*
(S) Sprint Nextel Corp. 9.76%**
(C) Citigroup, Inc. 3.33%*
(PFE) Pfizer, Inc. 1.90%*
(GE) General Electric Co. (GE) 3.01%*
(WFC) Wells Fargo & Company 5.48%**
(NOK) Nokia Corporation 10.70%*
(RF) Regions Financial 12.46%**
(JPM) JPMorgan Chase & Co. 2.69%*


SPDR S&P 500


(DIA) SPDR Dow Jones Industrial Avg. 1.09%*

*Based on optimal puts expiring in December, 2011.

**Based on optimal puts expiring in January, 2012.

Monsanto on the Move (by Mike Paulenoff)

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Agricultural product manufacturers of fertilizer and chemicals would appear to be a reasonable place to allocate some funds through the summer months in an otherwise unfriendly environment for the equity market — provided the technical work supports such a commitment.

My near- and medium-term work both argue that Monsanto (MON) ended a major bear phase in July 2010 at 44.61 and since has carved out a constructive and very promising pattern that should continue higher towards a confrontation with key two-year resistance at 73.80 next.

Originally published on

Two-Faced Portfolio

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Well, all my wailing and gnashing of teeth yesterday is somewhat relieved, since the bounce seems to be finally well on its way. All the foregone profits are a moot point now, as we are finally in the throes of a relief rally. I'm delighted it's finally started. Let's get this thing out of the way.

I bought a bunch of badly battered stocks to ride to the upside. I am still very, very "light" in my portfolio – merely one-third committed, and split between bullish and bearish. I expect the market will be very dull for the next few days at least. A good example of the kind of "bounce play" I'm after is shown below. This is the kind of stock I want to short after the bounce, but I want to ride it higher for this segment.


Just to be very clear about this – – – I think the shorting opportunity of the year is being built right now, although it could be as much as a few weeks off. I want to see the 100+ stocks I have in my Bear Pen watchlist recover to their former breaking points, and then I'm going to start getting very serious about not just shorting, but shorting to a commitment level way over 100%.

Meanwhile, I'm in a light-commitment, mixed-bag mode. Not the least bit exciting, but I want to bide my time sensibly.