Today was a big day to the downside for equities and normally in this situation I would put up a whole slew of charts showing all the technical levels that are violated.  However, today I do not have the time for that and it is not too hard to figure out that all the charts of the indices are very broken. I did, however, make a trade in my Roth IRA and I want to talk about that.

I’ve been waiting for a selloff in bonds and it looks like the TNX may have peaked. Intermediate term and long term treasury bond funds seemed to have cracked the 200 MA but inflation protected securities have not.  I’m betting on a bounce off of the 200. A big part of my Roth IRA is parked in cash yielding about 2% and I want to put some of it to use.  I want to park my money in longer term, higher yielding bonds, but I do not like the inflation risk with conventional long bonds.  Inflation protected securities seem to be a nice compromise. I am not saying that inflation protected securities is a great place to park your cash; I am saying that this decision was based purely on portfolio allocation and it just so happened that today seemed to be a good entry point. Sure, inflation protected securities may continue downward, but given the potential for upside as well as my current portfolio allocation, I am willing to give it a shot.

If you want to buy a mutual fund that buys inflation protected securities, consider the following:

1.  For a bond fund, given that the average return of about 4-6% per year, costs really matter.  Vanguard’s fund, VIPSX, has an expense ratio of 0.20%. Fidelity’s FINPX has an expense ratio of 0.45% and T Rowe Price’s PRIPX has an expense ratio of 0.50%.

2.  Do not buy inflation protected securities outside of a tax advantaged account such as a IRA or a 401k.  The tax code governing inflation protected securities is extremely unfavorable as well as complex.  Don’t get burned by the tax and don’t waste your time reading the tax code.

3.  Inflation protected securities are really a joke.  The bond coupon for a inflation protected security is lower than that of a conventional bond, but the principal that interest is paid on increases at the rate of inflation determined by the CPI.  But here’s the thing…everyone knows the CPI is understated. If the government wanted to rip you off as well as all the social security beneficiaries (and they are already doing that) they will just understate inflation through the CPI. Whatever you do, you probably will not beat inflation, but then again, it sure beats getting a 30% haircut in equities or getting burned by harder by inflation risk when holding a long term conventional bond.

I am still a little pissed about selling my XLF puts and missing a fat move down.   On a fat move down on the XLF, you just can’t short it.  There’s too big of a risk of a bounce.  So instead of buying back puts on XLF, I decided to buy a IYR July 63 put for $2.25. IYR is the ETF for commercial real estate.  IYR doesn’t have as much falling potential as IWM and QQQQ (measured by distance from here to prior low) but at least it’s falling as opposed to IWM and QQQQ which are slowly rolling over and about to break down hard (both need to be down a few more cents to confirm). I kind of want to diverify my short setups.

Btw, I got rid of lame XLF July 23 call for $0.45.  I have no faith in owning that option as my insurance policy against a bounce.

I went long one XLF July 23 call for 78 cents. Yes, that’s right, it’s a call and not a put.

I do not feel comfortable shorting XLF over $23.40 or so I dumped my XLF July 26 and 27 puts that I rolled not too long ago for a slim profit. I got a fat move down already so there’s no reason to complain. It may be a bad move, but no one ever went broke by taking profits, and I have to reduce my short exposure this week because this week is options expiration week and stupid things happen. I wouldn’t be surprised to see XLF go to $25 by the end of the week, but I wouldn’t take that bet by going long. I’m already short enough via IWM and QQQQ puts.

Yesterday I said I didn’t get get QQQQ puts on the break of $48 and that I wouldn’t be surprised to see a retest of $48 before going back down. I grabbed a QQQQ July 50 put for $2.65 this morning on the retest.

On a move like this, you just have to take your short position down. You’d be a fool not to at least trim some of it. I dumped a XLF June 29 put this morning. I’ve been burned too many times by not trimming my short position when it was time to do so. Many times, you don’t have time to get out of a short position before it’s too late. Stuff can gap up on you like XLF did on March 18th.