What to Short When the Rally Dies

I have been droning on for what seems an eternity (a few weeks) that I feel this market rally is just overdone and due for a fall. I still feel that way, but am getting to the point where I am going to put some money where my mouth is.

Now, don't get me wrong. I have been very happy to be wrong for the last month as the rally has been very good to me. Core large long holdings like Dow Chemical (DOW) (which I significantly added to at $6.80 in March and again at $9 in early April), AutoNation (AN), Sears Holdings (SHLD) and Wells Fargo (WFC) have all seen tremendous share price increases of at least 50% since the March lows (I am still down 10% in Wells Fargo overall though). This makes up for the gut-wrenching carnage in January and February, though Sears and AutoNation are up 50% and 60% YTD respectively.

Even Borders (BGP) has finally shown signs of life, almost tripling in a few weeks (still down 40% in this small position).

That said, I cannot escape the fact that the economic fundamentals of the economy do not warrant the general market rally we have seen. It is also possibly true that the drop we saw early this year was overdone, meaning part of this rally is simply correcting an overreaction to the downside in March. I am hesitant to fully buy into that though.

There are over 6 million folks without jobs now, the housing industry is simply in shambles and getting worse, foreclosures are surging, Q1 GDP is decidedly negative and Q2 looks only marginally - if any - better. Commercial Real Estate is the next time bomb to drop on banks and that fuse is only just beginning to burn, and the Federal Reserve is just about all out of ammo unless they want to start paying people to borrow. In short, not too much to be optimistic about.

Do I short CRE with the SRS ETF? Not for me. REITs are already on death's doorstep, so buying in there might be a bit like going hunting and shooting a deer caught on a trap - not very satisfying or meaningful.

Short financials with FAZ? Not too sure about that one either. While the rally there has been spectacular and unwarranted, it has become clear that the US Government will stop at nothing, including changing accounting rules, bogus "stress tests" and more capital infusions to make sure the banks are propped up. That said, I am hesitant to bet against the guy with the ability to change the rules of the game on a whim to make sure he wins.

Short the dollar with UDN? Now, while the dollar may be headed for devaluation because of massive Treasury actions, when compared to many other currencies, it may actually gain in value. It's perverse. In fact, since December that is what has happened. Being "less bad" than the other guy isn't really a reason to invest.

I think the safest way to so it is the simple SH Short S&P ETF, PSQ to short the Nasdaq or DOG to short the DOW. It tracks to daily price fluctuation of the overall index without exposing the holder to the negative returns of the leveraged ETFs. The 3X ETFs are only good for short term trades and the volatility will scare most folks. That and the downside pain is fast and furious and the longer you hold them, any downside you experience exceeds any upside you see later unless it is dramatic.

These can protect you from a market sell-off and unlike the leveraged ETFs, not hurt you bad should the market continue to rally (which it can, markets are not rational by any means). I like the SH the best of the lot. Should I go into it, the position will not be all too large, just enough to take the bite out of what I think is the upcoming sell-off.

Here is a good list of ETFs.

Disclosure ("none" means no position): Long Stocks listed, none in ETFs

Comments

[Deepv:]

Comparing the Nikkei to US shows zero skill or experience. in international market.s Japanese stocks for most of the past 20 year had sky high P/E rato and de minimus ROE. The rise never to '89 should never have happened. Today Japan stocks arae finally undervalued (large cash hoards and P/Bk below one) but still no ROE. Japanese companies with exceptions are just not run like american companies .

Apr 19 07:46 PM

[ps55:]

This rally will run out of steam this week..instead of criticizing short sellers, as the uninformed enjoy doing, it is helpful to have articles like this pointing out how you can profit from market conditions. This is a traders market, and information is power (and money). Speak with traders around the world and share information and trade ideas at marketfriends.com

Apr 19 10:57 PM

[DTCapital:]

I agree with Drew Arnold. After the recent run up, some sideways consolidation is in order. From a trend perspective, the recent bull rally is still intact. From Jan to March I was short the market. (December was spent staying mostly on the sidelines getting confirmation). The first two weeks of April have shelved that plan and I'm mostly back to the sidelines again. I have picked up some trades on the long side, but am treading lightly. My heart tells me that we're in a bear market rally but my mind drives me to trade the trend.

Apr 20 05:12 AM

[svosavvy:]

Ron paulite I gave you a thumbs up I liked your last comment. I would argue imho there needs to be a fundamental shift in how average people view markets. I have a real negative bias toward financial advisors/planners, I think they have sold mom & pop short. I think the very dangerous siren song of the market lulled the less cautious (cognizant) average person through their facilitating planner. Mutual fund redemption en masse could torpedo this sinking ship, confidence game pure and simple. I was reading peter lynch again a while back and remember where he said it basically took 20+ years after the depression where "stock" wasn't a dirty word in the amercian vernacular.

Apr 20 08:02 AM

[The Crossha...:]

Any rally and any pullback from the rally should be treated as a quick sniper trade-- in and out until the next big move is confirmed. Right now we will probably have a consolidation period followed by another run in one direction or another (maybe after earnings season is over). Just have to enter and exit the battlefield when given the signal. SSO is a good one to short and SDS is a good one to go long. Also, the stocks that were the weakest in this latest rally-particularly the oil stocks (XOM, HES) could be good candidates over the next few days.

Apr 20 08:31 AM

[LoveShorting:]

Anthony B - - good call (short AMZN). I opened my position a little early
so Jeff B. has taken my lunch so far but I am hanging in, confident that it will pay. Also, thanks for being concise: too many commenters enjoy the appearance of their own text a little too much. The market moves quickly and there are so many voices. Here's to writing less.

Apr 20 09:38 AM

[yellowhoard:]

Just sold half of my SDS and SRS from Friday's purchase, 6% gain. Stop losses on the rest at purchase price.

Apr 20 11:50 AM

[yellowhoard:]

Correction. 10% gain on SRS. Only 6% on SDS.

Apr 20 11:52 AM

[DonFurio:]

Looks like you guys are mostly traders, and that's fine, maybe we will go down for a little while now, especially since the socialists won't let the banks pay back TARP. However, I think it's worth noting that there have been basically record low house starts the last year or two, so that helps get rid of inventory and that people are buying houses in foreclosure. Will there be more foreclosures and more charge offs on consumer debt, sure, but in my opinion if you are a long-term investor, the past 6 months has and will continue to be a good opportunity to slowly add to positions. If you don't need the money anytime soon, there are still plenty of company with dividend yields over 4% that will not be cut, and 4% is far better than the savings/cd yields and you have the chance for capital appreciation.

Apr 20 02:03 PM

[tziv:]

with government tking over banking industry how can you say this is more than a bear market rally www.thegrubspot.com/20.../

Apr 20 02:07 PM

[Andy Connec...:]

companies are going down because the country we live in torutures it OWN CITIZENS at will!!! If you don't know that, grow up read a paper.


On Apr 18 10:04 AM Baboon wrote:

> If company is so sensitive to it's share price it should not go public
> in the first all. No one can drive a good company out of business
> by shorting it's stock. No good business model relies on the price
> of it's publicly traded stock. Any business deserves to go down for
> whatever reason (Maybe going public also implies taking risk). This
> is called capitalism, sir.

Apr 20 02:41 PM

[Andy Connec...:]

Leaders in Government torture our citizens at will
Housing industry in Cali messed around, developers were forced to take loans to build suspiciously large 100,000 home developments in death valley deserts. The government forced banks to lend to unemployed applicants, and many loan officers quit and would not do this, but most stuck around and collected commisions on these forced loans. All loan officers in California knew this was going to happen in 2007. It's common knowledge there that this was coming. If you disagree with me, take a trip to San Diego or LA and meet with ANY loan officer, and they will tell u exactly what I just did. Do that before you think about speculating on this and that about the market.

Apr 20 02:46 PM

[Andy Connec...:]

Also, California home loan losses account for 1/3 of home loan losses right now. So the California example is most improtant


On Apr 20 02:46 PM Andy Connecticut wrote:

> Leaders in Government torture our citizens at will
> Housing industry in Cali messed around, developers were forced to
> take loans to build suspiciously large 100,000 home developments
> in death valley deserts. The government forced banks to lend to
> unemployed applicants, and many loan officers quit and would not
> do this, but most stuck around and collected commisions on these
> forced loans. All loan officers in California knew this was going
> to happen in 2007. It's common knowledge there that this was coming.
> If you disagree with me, take a trip to San Diego or LA and meet
> with ANY loan officer, and they will tell u exactly what I just did.
> Do that before you think about speculating on this and that about
> the market.

Apr 20 02:47 PM

[Suncatcher:]

Does anyone living in Connecticut have a few minutes to go by and help Andy take his meds- I'm off to California to meet with loan officers. Disclosure: I haven't been tortured by anyone in more than six months.

Apr 21 12:00 AM

[Illusional ...:]

I played with FAZ and unfortunately got into the short side a bit too early. I am even at the moment and looking to go on some safe longs with my current shorts as hedges. I think the 1x ETFs are decent based on what I saw in the price movements. Unless you are doing swing trading, or a very convicted bull/bear, even for short term, I recommend you stay out of leveraged etfs. Well, if you have anything less than an iron stomach, stay away from levered etfs. 1x won't make you much money but at least you are hedged. There is too much intervention to know when the rally will start or end. For all you know, the magic carpet might appear or disappear right under your feet.

Apr 21 02:16 AM

[humandenatured:]

I think you're wrongly confusing shorts wanting to see failure happen and wanting to be correct in their prediction and assessment that failure is the most probable outcome given the circumstances. I don't think anyone takes glee in the fact that they are making money from others failures except maybe in those instances where that failure is serving out "justice" because it is a direct result from people acting excessively greedy and foolish. Unfortunately, there are always innocents who suffer from these events but these public failures do help our society construct ways and means to curb our excessive appetite for risk and gain that leads to these situations. Maybe one day society will value responsibility greater than risk and reward and these crises will become a thing of the past but it would definitely be irresponsibly risky to make that bet.


On Apr 19 11:57 AM Jolly_Rancher wrote:

> You can pretend to say you have no interest in what happens to companies
> after you short their stock, but you're only kidding yourself.<br/>
>
> What would your reaction be if you found out that Obama had shorted
> millions of shares of SPY last January and covered in March making
> a huge profit? You might say that's different because he's in a position
> to materially affect the outcome and therefore it would be considered
> insider trading. Or you might say that as America's leader, it's
> inappropriate for him take a position that benefits from the weakening
> of America's economy. Both would be correct. But what if he responded
> that he had no hopes or real interest in the underlying companies
> or the economy; it was a cool calculated trade; left his hopes and
> troubles in the old kit bag and smiled. I think you know what the
> American people would say; and the Congress, and the press. The fact
> is you're wrong. When you go short, you express your interest. You
> are your actions, not your beliefs.
>
> As for bond manipulation, you are correct. But rarely is it a meaningful
> issue in BBB+ or better, munis, US treasuries. I collect the coupons,
> then face value. The real manipulators like the to take money from
> the hyper traders who infest the stock market. And it's so easy because
> A) the game is rigged; and B) hyper traders are nothing more than
> compulsive gamblers who are losers almost by definition.
>
> Really, I have no problem with hoping that people fail in some circumstances.
> For instance, let's say you have a new technology for the production
> of shoes and you get the capital to start a shoe factory. By doing
> so, you are hoping to take over the shoe business which would invariably
> cause great economic hardship for other shoe manufacturers. Who cares?
> I don't. The difference is that you are providing a better shoe at
> a lower price for consumers. As your business grows you might even
> hire your competitors' employees. This is the nature of capitalism.
> But leveraging long positions 40:1 or shorting stock creates no economic
> value, esp. in the case of collusion. It's purely destructive.<br/>
>
> On Apr 18 01:36 PM mikesa69 wrote:

Apr 21 04:19 AM

[pockyclips ...:]

Why would you short DOG? Shorting a short ETF = going long.

Apr 21 02:22 PM

[Lee Eugene ...:]

Todd,

You nailed it. In fact, I feel you were spying on my notes from the last few weeks you scoundrel! SH and DOG are at the top of my list. I have been trading SDS, QID, SKF, for a while. However, yesterday I sold them out when it became apparent that when this rally does fade, it will not go easy. Immediate gratification on the short side in not to be had. Thus, you may be in the trade for a while and the non-leveraged shorts are the way to go. Sad really, I liked the quick pops in the morning!!!

Apr 21 03:11 PM

[rpgpa:]

well now that its obvious that Obama's cry of not letting american jobs go offshore, (ahh eemm IBM ,,ya listening) and yes to PROFITABLE companies. Yes. You would have to pay me interest to buy a house. Its not like one can go asleep and say, yea my job is secure because my company is profitable. You can do what you want to get people to buy houses but as long of this now joke of a country where public companies sell out for the gain of their largest shareholders i wouldnt buy a house if Obama himself paid me. Well guys. the American run was nice for 100 years. The last sucker to believe in any dream, please turn out the lights. PS isnt it ironic here we pay such close attention to public companies when its this very entity that will and is the core of our destruction. sad

Apr 21 07:24 PM

[Richard Woon:]

Short the weak sisters... the REITs!

I like ACC, ARE, KRC, PLD, HCP, VTR

Apr 22 01:43 AM