Tuesday, March 24, 2009

Dialing Down Leverage After a Rally

All blog entries at Rotten Investments are subject to our DISCLAIMER.

Market events of the past three weeks underscore the incredible gains that can be enjoyed with just a dab of leverage. If you were long the S&P at 700, your portfolio would be up at least 14% now. However, if you had increased your exposure to 1.5x the S&P, you'd be up over 20% for that same period.

I remain convinced that a long-term recovery is in progress. And yet, it's times like these where you dial back your leverage after a rally. If you swapped some index shares to buy the $25 LEAP calls I mentioned in my last blog (symbol: OBMLE), you might want to consider swapping them back. You don't have to go from 1.5x leverage back to 1.0x (unleveraged, but still long), but you might want to at least consider going to 1.2x the index or less.

Stock market recoveries almost never occur in a straight line. You might not get another opportunity to buy at 700 again, but 100 to 120% long the S&P is still a good place to be to enjoy future gains.

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