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