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Managed Risk Investing
TangoETF Inverse Option
The TangoETF shorting option which will be called the Inverse Option. 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.
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 a previous top of the S&P500. 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 Aggressive 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 If you want to get started with inverse funds during a Bear State Signal. The next best time is when the Tango6x Market 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 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 a top of the S&P500.
In this chart below I have placed the pole one day after the Bear State signal, this would be 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 Market Risk 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 a 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 draw-downs 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 this would have been a good entry point.
Charts by www.fasttrack.net