Two Heart Attacks in Two Days

by JDH on August 27, 2016

Not real heart attacks.  Figurative heart attacks.


As you know, my favorite vehicle for speculating on the price of gold isNUGT – Direxion Daily Gold Miners Bull 3x Shares NYSE + BATS, a 3x leveraged ETF.  As you can see from this chart, NUGT opened on the morning of August 23 at over $29, and by 3:00 pm on August 24 it touched $21, a top to bottom crash of over 27%.

Yikes.  A 27% crash in two days will give anyone a heart attack.  Fortunately for me I was not fully invested.  In fact, I was only 10% invested, so the crash was not particularly damaging to me.  More on that later.

The second heart attack came on August 25.  For the last few months NUGT has traded in the range of $125 to $180, so when the market opened on August 25 and NUGT dropped below $21, I panicked.  What happened?  How could a stock lose four fifths of its value overnight?  Did the world implode?

Nope.  There was a 5 for 1 forward stock split.  As reported a month ago (which I either ignored or had forgotten about):

NEW YORK—July 26, 2016—Direxion has announced it will execute … forward share splits for another five leveraged ETFs. The total market value of the shares outstanding will not be affected as a result of these splits…

Direxion will execute forward splits of the Direxion Daily Brazil Bull 3X Shares, Direxion Daily Real Estate Bull 3X Shares, Direxion Daily 20+ Treasury Bull 3X Shares, Direxion Daily Gold Miners Index Bull 3X Shares and the Direxion Daily Junior Gold Miners Index Bull 3X Shares.

That would explain why the shares lost four fifths of their value.  Heart attack averted.

Here’s how the purchases played out (for quantities I list the % of a full position, so if I want a position of 1,000 shares, buying 100 shares would be the equivalent of 10% of a full position):

  • August 22 trade date, purchased 10% of position for $140.70
  • August 22, purchased 10% more for $141

Then the crash began happening, so I started averaging down; obviously I started too early:

  • August 24, purchased 50% of a full position for $126
  • August 24, as the crash happened, purchased another 10% of a position for $106.

In hindsight, I should have waited until it hit $106 to start buying, but who knew?

The upshot is that I bought 90% of a full position at prices averaging $130.45, which after the the 5 for 1 forward split have a cost base of $26.09.

On Friday morning at 10:00 am NUGT touched $21 (or $105 pre-split), so I was sitting on a loss of almost 24%, and that’s with a lot of buying after the crash.  Since the equivalent of $29 on the morning of August 23, that’s a drop of 38%.

That’s volatility.

So what’s the play now?

Same as always.  We may be in for a rough patch in gold, because nothing goes up forever, but the plan is to stay the course.  If gold is weak at the start of the week I will average down.  If it’s strong I’ll sell into strength.  I will also continue to diversify with my holdings in Alterra Power.

Thanks for reading.  More next week.