Market Timing This Market

Market Timing has been and will continue to be a difficult strategy (especially when its not your original strategy) and many have found this particularly true this year, whether it was going to cash the day before a huge market rally or deciding the market had hit the bottom and it was time to buy again only to find the next three trading days end with a 500 point drop.

To punish bad market timing decisions, Direxion has put out several ETFs that give 300% daily return (or 3x inverse return) relative to each respective benchmark.

How the punishment works.

Leveraged ETFs, by design aren’t made to be held for the long term, hence, they only provide 2x or 3x the daily return.  Powershares has a PDF on their website that explains this principle involving geometric return.  Basically, during volitily markets the upside of this ETFs do not make up for the downside.

So, the investor holding these ETFs only does so for very short periods of time, maybe a day or two.  Today Nov 20th, some decided to bet that the S&P would have an up day and were wrong.  The Leveraged ETF investors were 3x as wrong as regular market times and paid 3x as much.  Losing 17% in one day when the S&P 500 is down 6.71%.

This pain is worsened by how the market works.  Panic often seems to drive prices lower than they should be fairly priced.  However, panic is never sensible, wildly driving prices to fair value.

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