A Summertime Short Play with SDS 25 comments
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The market has enjoyed an impressive rally, as the S&P 500 gained nearly 38% in under three months. But the rally is showing signs of strain as investors look to book profits ahead of the seasonally-slow summer months. The average return for the Dow from the start of May to the end of October over the last 20 years has been 0.44%, while the average return from the start of November to the end of April has been 6.86%.
But we are not in normal economic times, so anything goes this season as investors are hungry to regain large losses incurred over the past year. Even with the 38% gain, the S&P 500 is still 40% lower than the start of 2008. That’s the rub - a 40% recovery doesn’t make up for a 40% loss. So I think we will see an unusually active Summer season in the markets.
The V-shaped recovery is truly beautiful to behold, but has run into significant resistance. Rallies have failed on three previous attempts to break out from this range. In addition, technical indicators are flashing overbought and have approached levels not seen since May of 2008, just prior to the 50% crash.
I don’t believe the market will muster enough energy to breach this resistance and think we could see a sharp sell off into the end of May. If I am correct, this presents an huge profit opportunity by purchasing the ProShares Ultra Short S&P 500 (SDS).
SDS has support just under the $60 level, which provided resistance on four separate occasions during 2008. Technical indicators are flashing oversold and have just begun to turn up. I like SDS at these levels and while only time will tell if we are too early with this trade, I established a position this week and added the fund to the Gold Stock Bull Portfolio.
The big question on the minds of investors is whether or not the markets have put in a bottom. Many assume that a rally of this magnitude is evidence enough that the worst is behind us. Others, such as Peter Schiff, claim that the collapse has barely begun. And if you study the history of recessionary periods in America, rallies of this magnitude are par for the course. They are referred to as “suckers” rallies, as investors get sucked back into the markets before the correction has truly run its course.
However, if you throw enough money at a problem the stimulus can endure. But many see this tactic as delaying the inevitable and amplifying the magnitude of its eventual resolution. I agree with this perspective and see the current rally as a smoke and mirrors illusion, designed to inspire confidence in the markets and prevent public panic. Until job creation and manufacturing turn the corner, it is difficult to believe we are out of the woods. Unemployment figures continue to worsen and the only job creation is coming from the government. This isn’t a good sign and doesn’t suggest that the current rally will be sustained.
The trillions of dollars borrowed, printed and injected into the economy certainly seem to be having the desired effect. The question is whether this will produce a short term blip or lead to sustained economic activity. Stock prices may hold up in nominal terms, but the 800-pound gorilla in the room is certainly inflation. I can’t imagine how it would be possible to escape inflation after the unprecedented amounts of money the government has printed and borrowed to stimulate the economy. Nor do I see how the Fed could mop up the liquidity even if they had a sincere desire to do so. It has never been attempted on this scale and the result would almost certainly lead to a free fall in the markets.
So, my expectation is stagflation with the possibility of hyper-stagflation. This painful combination of recession and high inflation means that most Americans won’t be able to increase their incomes fast enough to keep up with the inflation. And many will lose their jobs as unemployment rates continue higher.
It isn’t a rosy scenario, but serves to underscore the importance of hedging against inflation. Commodities in general and gold in particular should do very well in this environment and help to protect investor wealth from the hidden tax of inflation. Indeed, gold has already been the best performing asset class over the past 8 years, with the metal more than tripling in value. Critics argue that gold does not pay interest or dividends, but I’ll take a 300% gain and no dividends over the performance of any dividend-paying stock or interest-bearing account in the past decade.
Disclosure: Long SDS
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This article has 25 comments:
On May 15 09:49 AM BigJake wrote:
> I dunno. I thought the same thing back at the beginning of april
> and bought a few SDS positions between 67-72 figured I'd dollar cost
> average in. I pulled the emergency eject button the day the news
> broke than BAC needed 35 Billion and the market rallied. One of
> those the market can stay irrational longer than you can stay solvent
> deals.... I would not bet against the trend until it is clear the
> tide has turned the other way.
Does this make any sense to people or am I out of my mind and about to lose my shirt? :)
> I implore readers not to short the S&P 500. The fed printing
> press is in overdrive , and fighting the printing press almost always
> in disaster.
Hey Cetin, remember how you said on Monday evening of this week that markets would recover nicely Tuesday morning and continue upwards the rest of the week?
That was a very specific prediction.
And they haven't done that ... down about 3.5% so far this week and barrelling downward today.
Do you still think they're going to recover 3.5% in the 2 1/2 hours until close?
Also, do you really think you have ANY credibility?
This time is different; the sustained fall since May 8 makes it much more likely the rally has peaked and we're moving from 'pump' to 'dump.' I believe it now *IS* clear that the tide has turned downward.
I'm buying SDS, DOG, SH, and PSQ and setting a tight stop limit on all of them. If the rally breaks, I win; if it doesn't, I only take small losses.
On May 15 09:49 AM BigJake wrote:
> I dunno. I thought the same thing back at the beginning of april
> and bought a few SDS positions between 67-72 figured I'd dollar cost
> average in. I pulled the emergency eject button the day the news
> broke than BAC needed 35 Billion and the market rallied. One of
> those the market can stay irrational longer than you can stay solvent
> deals.... I would not bet against the trend until it is clear the
> tide has turned the other way.
On May 15 12:56 PM BigJake wrote:
> Does this make any sense to people or am I out of my mind and about
> to lose my shirt? :)
On May 15 12:56 PM BigJake wrote:
> i don't disagree as I bought it on the belief that hey we've gone
> pretty far, we're at least due for a retracement and well it looks
> like I ended up a fighting the governments PR campaign and fed liquidity.
> That was a fight I didn't want to get involved in. While it seems
> like the flow of good news was over, there are alot of powerful people
> that have their reputations staked on "green shoots", "glimmers of
> hope", etc... While I seem to be in agreement with most that its
> a bunch of BS, I also look at all the past recessions where sure
> enough they just pumped the bubble back up. China seems willing to
> allow us to do it again too. So I see both sides of this trade. I
> have changed my strategy to go both BGU & BGZ with a bit of FAZ
> thrown in to cancel each other out. My plan is to sell into whichever
> is profitable as the market oscillates. I'm guessing we are looking
> at a rangebound trade for a few weeks here as the bulls & bears
> fight it out. If something moves decisively in a particular direction
> thats when its time to roll up the losing position.
>
> Does this make any sense to people or am I out of my mind and about
> to lose my shirt? :)
Intermediate term I agree with Cetin on this one.
The bubble is being re-inflated. With the steep yield curve the greatest opportunities are in financials.
Anyone who predicts long term is fool, liar or just got lucky - Roubini & Schiff included.
still thinks you can't fight the fed. any other dumb out dated useless information you want to share with us. If you haven't noticed fighting the fed has been a super winning trade for going on 2 years now.
Fed lost control 2 years ago where have you been? If you trade off out dated information, thoughts or concepts that they want you to continue to believe in than losing your shirt is where you are heading.
GS could use the thin summer trading as an opportunity to gun the averages up on behalf of the Fed and Treasury.
The market ought to go down, but it might go way up.
I'll probably take a position in SDS soon, but it will only serve to balance my longs.
On May 15 04:23 PM maximummarket wrote:
> Carefull, the leveraged etfs are like swimming in theta. You could
> have been long FAZ and FAS last november at roughly 55$ respectfully.
> Today FAZ closed at 5.9 and FAS closed at 8.74. If the market trades
> flat, the extreme leverage on the FAS and the derivatives in the
> FAZ depreciate. This happens in flat markets after extreme volatility
> has occured. Same principle with BGZ and BGU but not as extreme.
>
Perhaps a good strategy is stay on the sidelines for 4-6 weeks, wait for volatility to pick up (or not), and then deploy the capital based on conditions then.
The market will tell us what to do: if it's repeat of 2008 pattern, then you re-enter end of June with SDS (still lots of upside to $100+).
GLD in the low $90's now; peaked just above $100 03/08, for those who missed ~300% run-up from 2005 do you suggest it can do a repeat performance? Upside of 11% or maybe 67%?
Somehow, I can;t get behind gold but I am not saying you are wrong by any means. The fact that China ia now buying less US debt and instead buying gold might certainly argue for a rise in gold prices, still I keep making that dividend play.