Wednesday, November 7, 2007

Financials tank but UltraShort ETF is up nicely

Investors were greeted with a barrage of bad news this morning. GM reporting its worst quarter ever including a charge of $39B. Rumors of a $3B to $6B writedown at Morgan Stanley. Gold futures up, the dollar down. Estimates that the value of broken buy-out deals will total $200B this year. Ratings agencies downgrading $92B in corporate bonds. Reports of $5B of defaults in CDOs. Banks like Washington Mutual and Citi continued to garner bad press with conjectures of more writedowns, law suits, etc. Bloggers were starting to use phrases like "perfect storm". Stock futures indicated a big down day on the way.

In thinking about which sector would be hardest hit, it seemed that the financials were about to really take it on the chin. Looking at the Select Sector Financial SPDR (XLF), it is already down about 18% this year. Could it go lower?

I have written about avoiding chasing trends when using sector ETFs. In the case of the financials, the trend has been clearly down for a while now. But surveying the day's news I began to get a knot in my stomach. Yes, I felt, the financials could continue on their downtrend.

After the open, I bought some shares of the ProShares UltraShort Financial ETF (SKF) at $93.46. The ETF closed the day at $99.55 for a 6.5% gain and new 52-week high.

Disclosure: author owns SKF



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