Checkmate

By: Joseph Russo | Sat, Sep 24, 2011
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Netflix

Breaking Up with Netflix

Our long-term bullish investment exposure to Netflix ended on Monday September 19, 2011. Though price drew down some 48% from peak value, we exited our 2 ½-year long-term investment with a return in excess of 450% at an exit price of $159.69 per share.

On August 1, 2011, when Netflix fell just 13% from its all-time highs, we began hedging 30% our long side exposure by moving short the shares at $266 in Short-Term trading accounts. We continue to let profits run on these short positions.

We took further measures to hedge long exposure back on August 2 when we moved short an additional 30% of our long-term investment exposure at $261.74 in Mid-Level speculative accounts. We continue to let profits run in these accounts. We are now net short the shares across-the-board.


Direct Strategic Diversification: DSD

What Is It, and Why You MUST Acquire It to SURVIVE & PROSPER

If you wish to avoid tragedy, you must adopt the strategy. Simply stated, strategic diversification is a means by which to engineer a direct and measured level of protection by instituting multiple time-frame long/short investment/trading tactics. This simple and direct approach is far superior and replaces the convention where one attempts to adhere to a long-only approach in the quest to find non-correlated issues or sectors to diversify the deployment of capital in effort to hedge, enhance, or mitigate risk.

This type of direct diversification is far superior to conventional means, and is essential to adopt in order to effectively hedge, enhance, and mitigate risk in all market conditions.


How is this strategy working out for our portfolio?

PHENOMENALLY WELL! The vast majority of our net positions and equity curves are RISING, STABLE, adequately hedged, and performing brilliantly - delivering alpha well in excess of the benchmark S&P. The strategy has performed in this manner amidst all of the financial turmoil experienced over the past decade. In other words, we are consistently KICKING ASS on an absolute basis and shall continue to do so. How is your strategy working out?

With share values recently exhibiting a 90% correlation to movements in the benchmark S&P, "conventional diversification" measures provide no strategic value whatsoever.

The Netflix strategy outlined above exemplifies the purest form of direct diversification protection, which can also enhance long-term investment performance when all three strategies of engagement align in the same direction of a sustained move (IN EITHER DIRECTION). The beauty of Direct Strategic Diversification it that it is quite efficient in delivering absolute returns amid all market cycles regardless of the varying levels of historic correlation present throughout the financial sphere.

This form of strategic diversification is a direct hedge and enhancement tactic that augments long-term investment exposures by deploying Mid-Level and Short-Term strategies, which tactically trade with and around larger core positions.

As an aside, many of the largest brokerage firms and top-tier investment banks will convey in their prospectus disclosures that although their funds strategic approaches are historically sound, that there is simply no way to avoid the downside risks associated with events like those which occurred in the 2008-2009 financial crisis. Those with a minimum of one million dollars or more pay a minimum annual fee of $10,000 or 1% of their account size (plus a % of profits) for the privilege to participate in select hedge funds of such sort. To that, we say BUNK!


How Does One Accomplish This?

The simplest way to accomplish this is by deploying three separate brokerage accounts. One earmarked for Long-Term investments, one for Mid-Level speculation, and the third for Short-Term trading.

These general methods of strategic diversification are exactly what we spell out for subscribers on a daily basis.

In the Netflix example, approximately 60K in investment capital was required to work such a strategy. One would have needed to pony-up 35K to acquire the initial long-term stake, and an additional 25K split between the two other accounts to engage the issue using Mid-Level and Short-Term trading tactics.

Here is how one may have followed along. On December 27, 2008, we executed a long-term investment shift in Netflix by moving long 1,234 shares at $28.46 at a cost of $35,119. Below is a graphic summary journal of the results we have achieved using the proprietary (DSD) Direct-Strategic-Diversification tactics throughout the course of our ongoing engagement with Netflix.


The Results

Averted Tragedy by Using the DSD Strategy

Although our engagement history goes back much further than 2007, for the purpose of this example, the three tables and equity graphs below provide recent snapshot histories of how the multiple timeframe DSD strategy has performed through September 23, 2011.

Do bear in mind that each of the three proprietary accounts employs robust strategy-specific tactical shifts unique to their specific objectives.

The tables document each accounts entry and exit by date with a signal bias, price, number of shares, and a profit/loss ledger for each trade.

In addition, to the right of each table is an associated equity graph representing the detailed path of profitability produced from each account.

Following the crash in Netflix, note the massive 48% drawdown from peak equity illustrated in the graph to the right of the Long-Term investment history listed in the first of our three tables.

Next, take note of how both Mid-Level and Short-Term trading accounts began to hedge 60% our long exposure in the two remaining tables.

Despite the fact that our long-term investment returned in excess of 450%, without the hedges in place courtesy of our Mid-Level and Short-Term trading accounts, it would have been extraordinarily tragic nonetheless to stand by and witness peak equity cut in half before taking profits.

As such, breaking up with Netflix was NOT that hard to do. In fact, we never really broke up. We remain engaged (from the short side) and Netflix continues to give us plenty of good lovin' just like she always has. What a catch!

The DSD strategy delivers similarly impressive results throughout the broad markets, individual stocks, Bonds, ETF's, Futures, Commodities, and FX Markets. For subscribers, we combine many of these markets in our daily recap of the proprietary DSD portfolio.

Members are free to evaluate positions taken within each timeframe of the portfolio, decide which may be of value, and determine which may be appropriate to replicate in their own trading or investment accounts.

As further testament to the DSD strategy, below is a side-by-side comparison of the S&P 500 from 1960 - 2011 on the left, and the equity curve produced by our Long-Term investment exposure to the benchmark on the right.

Bear in mind that the side-by-side comparison charts below are simply an apples-to-apples comparison of the one-to-one stability, alpha, and absolute returns achieved in the strategic Long-Term trading account vs. buying and holding the S&P throughout the 50-year period. It does not include the equally robust hedge, enhancement, and risk mitigation benefits derived from our Mid-Level and Short-Term trading accounts.


Conclusion:

Avoid Tragedy - Adopt the Strategy

One of our ultimate goals is to develop and bring to market a small family of DSD hedge funds or ETF's that strictly adhere to the coordinated disciplines that embody the Direct Strategic Diversification methodology.

As simple as it is, even when spelled out in black and white, many people simply do not have the patience, courage and discipline to adhere to, properly execute, or consistently manage the strategy protocol.

In contrast, a strategically dedicated ETF or Fund would execute perfectly, and thus create an ideal solution for millions of ordinary investors who lack the essential patience and discipline to tap into this Holy Grail of investing.

One of the directives would be to make sure that these products would be within the reach of the common investor. Since the strategies execute automatically, fees should be relatively low. Another objective would be to keep the minimum account size requirements within reach of the ordinary investor instead of restricting access to accounts of a million dollars or more.

If you think that you (or someone that you know) might have an interest in participating in the development of such products and/or have a unique skill-set or hands-on experience at any level of related operational development, please feel free to contact us to share your thoughts.

Until then, the DSD portfolio shall remain available via the NAVIGATOR by subscription only.

Trade Better/Invest Smarter

 


Elliott Wave Technology provides a suite of Winning Solutions designed to assist those who wish to trade better and invest smarter based upon the practice and deployment of proven trading strategies in concert with expert and unbiased chart analysis.

 


 

Joseph Russo

Author: Joseph Russo

Joseph Russo
Chief Editor and Technical Analyst
Elliott Wave Technology

Joseph Russo

Since the dot.com bubble, 911, and the 2002 market crash, Elliott Wave Technology's mission remains the delivery of valuable solutions-based services that empower clients to execute successful trading and investment decisions in all market environments.

Joe Russo is an entrepreneurial publisher and market analyst providing digital online media solutions designed to assist traders and investors in prudently and profitably navigating their exposure to the financial markets.

Since the official launch of his Elliott Wave Technology website in 2005, he has established an outstanding record of accomplishment, including but not limited to, ...

  • In 2005, he elicited a major long-term wealth producing nugget of guidance in suggesting strongly that members give serious consideration to apportioning 10%-20% of their net worth toward the physical acquisition of Gold (@ $400.) and Silver (@ $6.00).

  • In 2006, the (MTA) Market Technicians Association featured his article "Scaling Perceptions amid the Global Equity Boom" in their industry newsletter, "Technically Speaking."

  • On May 6 of 2007, five months prior to the market top in 2007, though still bullish at that time, he publicly warned long-term investors not to be fooled again, in "Bullish Like There's No Tomorrow."

  • On March 10 of 2008, with another 48% of downside remaining to the bottom of the great bear market of 2008-2009, in "V-for Vendetta," using the Wilshire 5000 as proxy, he publicly laid out the case for the depth and amplitude of the unfolding bear market, which marked terminal to a rather nice long-run in equity values.

  • Working extensively with EasyLanguage® programmer George Pruitt in 2010 and 2011, the author of "Building Winning Trading Systems with TradeStation," he assisted in the development of several proprietary trading systems.

  • On February 11, 2011, he publicly made available his call for a key bottom in the long bond at 117 '3/32. Within a year and half from his call, the long bond rallied in excess of 30% to new all time highs in July of 2012.

  • For the benefit of members and his general readership, he responded to widespread levels of economic and financial uncertainty in the development of Prudent Measures in 2012.

  • He publicly warned of a major top in Apple on October 26, 2012 in the very early stages of a 40% decline from its all time high.

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Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
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