U.S. Stock Market - Extraordinary Short-Sale Opportunity

The S&P 500 (SPY) ETF posted an all-time intra-day high today along with the Russell 2000 Index. The Nasdaq Composite Index saw its highest level since September 2000 at one point early this morning, but this closely watched stock market barometer actually ended today in negative territory. To begin the day today, traders and investors were surprised (and apparently pleased) by former Treasury Secretary Lawrence Summers’ sudden withdrawal of his name from consideration for the next Chairman of the Federal Reserve. Stocks, bonds, gold, and silver were all up sharply in overnight dealings ahead of Wall Street’s NYSE opening, but the mood began to change throughout the day. Most major stock indices gave up half their gains, and some actually finished lower on the day. Bonds, Gold, and Silver all ended today in negative territory as measured by TLT, GLD, and SLV (popular ETFs).

The latest issue of Time Magazine shows a Wall Street bull on its cover. While Time Magazine isn’t what it used to be, this latest cover could be seen as an interesting “contrary indicator” where U.S. stocks are concerned. This weekend’s Barron’s Magazine had a nice review of the forecasting record of key magazine covers when bulls or bears were featured. Some older traders and investors may remember the legendary “Death of Equities” cover of Business Week in August 1979. The Dow Jones Industrial Average was just below 900 at that time. As I recall, the final bottom was just below 800 in August 1982 after which an 18-year monumental bull market began.

 

Daily chart sell signals were triggered today by my computer trading system in the Nasdaq 100 (QQQ) and several dozen key stocks (ALTR, AMZN, CVX, EBAY, DISH, INTC, INTU, LNKD, LSI, NWX, SBUX, SNPS, USG), and a buy signal was triggered in the VIX (which indicates that a significant increase in stock market volatility may be imminent!).

Bottom Line: Only sophisticated traders and investors should consider short-selling as a serious portfolio strategy. With certain short selling tactics, it is actually possible to lose more than 100% of your initial investment. Poorly timed short sales have been known to completely wipe out many experienced, veteran traders. And some of these wipeouts are legendary. However, with this disclaimer loud and clear, I believe there is justification for a meaningful short position in the U.S. stock market right now. Single-short and double-short ETF’s are readily available and fairly liquid in most major U.S. stock indices where downside risks can be defined. In the interest of full disclosure, I currently have a position in the S&P 500 double short ETF (symbol SDS) in my managed accounts. 

Nasdaq 100 Weekly Bar Chart with Computer-generated Buy & Sell Signals

Nasdaq 100 Daily Bar Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market - Monthly Chart Sell Signals !

Effective at Friday’s close, August 30^th, monthly chart sell signals were triggered by my computer-based trading system in both the Dow Jones Industrial Average and the Dow Jones Transportation Average. Please see charts below. Weekly chart sell signals were also triggered in the S&P 500 Index, the Nasdaq Composite Index, and the Russell 2000 Index effective on the same date.

Despite the fact that the Dow Jones Industrial Average was down 4.4% in August, the cover of this weekend’s Barron’s Magazine says “THE BULL’S IN CHARGE” and that Wall Street’s top strategists see the market headed higher, with stocks rising 20% or more over the next 18 months. It may be an understatement for me to write that I don’t think this optimism is justified! In fact, based upon my computer-based trading program, I actually think a 20% decline is much more probable, and I would not be surprised to see a 40% decline in several major stock market indices, top to bottom, at one point along the way over the next 18 months.

Bottom Line: In my view, cash is king right now! A major stock market correction has begun, and we may even be in the early stages of a fairly significant bear market. Because I believe there will be at least one major liquidity scare at one point over the next several months, there are very few places to hide for most conservative investors right now. I don’t even want to own Gold/Silver mining shares at current valuations, even though this sector was my favorite over the last four months. Longer-term Treasury Bonds will probably offer positive investment returns over the next year, but the volatility and potential downside risks in this sector may not justify the modest investment returns expected here. Sometimes, a sideline stance is the best stance! Preservation of capital should be the driving force of all investment decisions right now, which means CASH IS KING !

Dow Jones Industrial Average with Computer-generated Buy and Sell Signals

 

Dow Jones Transportation Average with Computer-generated Buy and Sell Signals