Tango5 Members Update 022809
TangoETF Inverse Option and What the Future Holds
This Update is number five in a series. The previous three Updates in this series are posted under NEWS on the Home Page for your review. The broad subjects covered in this series are below.
1. Is 2009 going to be Better, the Same, or Worse than 2008?
2. How are we doing in terms of Performance from Inception and during
the 2008 Bear Market Period?
3. Trading systems changes needed if any. I think we need the ability to
go Short at times and Expand Endurance's capability. More on this and my research later.
The TangoETF shorting option which will be called the Inverse Option is in the programmers hands and we are working through some design decisions. If subscribers want to use this Inverse Option there is a critical question? When do I start using an inverse fund? As a subscriber there are some risks that you should be aware of, I will cover those risks with some charts below.
The second item for today, what will my investing look like in the future?
John Mauldin has some interesting views on our item number 1 above.
To review, if you use the Inverse Option you will be Long/Cash in the Bull State and switch to Long/Inverse(short) in the Bear State. The timing on when you start using inverse funds (essentially the equivalent of shorting the market using a long position order) is very tricky. Use CAUTION on this decision. The chart below starts on the left side at the most recent top of the S&P500 and extends to last Friday. The red is TangoETF Aggressive using the Inverse Option with 50% MYY (Inverse 1X S&P Midcap) and 50% cash. The green is TangoETF Aggressive using 20% MYY and 80% cash. The yellow is TangoETF Aggressive with 100% MYY and 0% cash. The purple is TangoETF Aggresive real time results without using the Inverse Option. The blue line is the S&P500 for reference.
The very best time to start using the Inverse Option would have been at the green tick mark (02/07/08 Bear State Signal) on the chart below. If you wait for the next Bear State Signal it could be a long time, it was 1 1/2 years between the previous Bear State Signal and the current one below. If you are very conservative you can wait until the next one, that is the safest entry. But I want to get started with inverse funds before this bear market is over. So the next best time is when the Tango6x signal goes to a Sell, this would be after the next Tango6x Buy then on the Sell you would buy an inverse fund. You want to start at some intermediate top in the market. You might start your Inverse Option if the lowest low is taken out during the next Tango6x buy period, this is guessing and if it just turns around and goes up you will be on the wrong side of the market and will be in for a loss. You can clearly see the improvement in the three inverse scenarios by studying the numbers on the right of the chart. Again, this is from 10/10/07 which is the recent top of the S&P500. 
In this chart I have placed the pole one day after the Bear State signal, this would the first day you would have owned the inverse fund. Please note that before the Bear State signal theTango6x signal was on a sell (the purple chart) and you were in Cash. In the red chart you started your inverse position during your cash period. This will happen on many occasions. In other words the Bear State signal will not line up with the Tango6x intermediate term signal. Again, please study the results in the numbers on the right side of this chart.
In this next chart we will play what if? and see what the extent of the gains or losses might be. First, notice the SD (standard deviation) numbers on the left of the chart. You can see the volatility (risk) ramp's up the more of an inverse fund you use. The 1X (yellow) is very volatile. This shows me to forget about the 2X and 3X inverse funds, they have other problems I won't go into here but they will not be used in any TangoETF sample portfolios.
What if you started using the Inverse Option at the very worst time? I have set the solid pole at the current bottom of the S&P500, which would be the top of the various inverse charts. The dotted pole is set five days latter and look at the drawdowns in five days. The 1X inverse MYY (yellow) would be down 20% and most of us would bail with a 20% loss. This is not pretty, even the 50% inverse (red) is down 10.5%. So this can be a wild ride, the bull rallies in bear markets are mostly violent because of the short covering by the active traders.
The next and last chart the pole is set at the last Tango6x sell signal, you can see so far this would have been a good entry point. 
Charts by www.fasttrack.net
Some thoughts from John Mauldin on the longer view of investing in the stock market Buy and Hope Investing
John Mauldin http://www.frontlinethoughts.com
If the above charts and explanations are not clear, email me.
Prepare for the worst and hope for the best, Don
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