Start of the Shorting Season?

It was a bit uncanny when the Dow dropped suddenly on the opening Friday. It almost seemed that astrologers might be proven right after all in pointing to August 14th as an auspicious day for global stock markets.

But if a crash did not follow, the markets did move low enough to leave many down for the week, the first break in this long bear market rally. Is that it? The S&P and Nasdaq have rallied by 50 per cent from the March lows, making this rally unusually long and strong.

Falling US consumer confidence

The US consumer confidence data Friday reminded the markets that all is not well in the global economy, and that while economies might be in the process of bottoming out, the situation is by no means as rosy as stock market optimists would like to believe.

After the 1929 stock market crash a rally of similar length followed, and just as everyone thought the worst was over, the market plunged again. The risk this time is that the stimulus plans have created a false sense of security and may not actually be enough to prevent a third and probably final down leg.

Putting in some short positions is useful to hedge against this possibility even if you do not fully hold that it is likely to happen. The short ETFs are very handy as a way to short stocks if you are not comfortable with handling this type of investment. And if you are very confident about a crash coming then leveraged ETFs can be used, but only for relatively short term trading as the gearing works against a long-term hold.

Red alerts

The warning signs about upcoming market weakness are far more than astrological. Global trade is showing renewed weakness as shipping rates are falling again. The dollar is looking a bit stronger as a safe haven asset.

Oil plunged precipitously Friday – short oil ETFs were the best bet of the day – and an end to the commodity rally would pull equities down.

We even had the largest US bank failure of this year. I do think investors are presently in an imaginary recovery mode that will catch them out, and probably very soon. So this could be the official start of the shorting season.

Comments

[Dave Wrixon:]

By my count we are entering the second downward leg, but not necessarily the final one.

Aug 16 05:59 AM

[djk!:]

I wonder how those short positions that people put in on 4/14/09 after you declared an end to the *sucker's* rally are looking now? Ya think the market will "correct" enough for them to just make back the dough, much less a little profit? Hey Peter, predict this, Is it going to snow in Dubia on 12/25/09? Get it right and you might want to consider being a weatherman.

Aug 16 08:49 AM

[Pauly B:]

Technically we are in a bull run. A few technicians see it that way too. However with this light volume during summer it is really not that hard to prop up the market by the close to make it a bull run. There are beginning cracks though forming that point downward. Going into September I look for more downdraft.

Aug 16 08:53 AM

[DavyJ:]

I'm a little leery. Look at this almost perfect inverse head and shoulders pattern on the weekly chart.

stockcharts.com/h-sc/u...

For fun look at the same chart of DOG, the inverse of DIA. Notice how we're now below the neckline. For more fun look at DXD or SDS.

Kind of scary if one is bearish.

Or is this another setup as was the daily head and shoulders of 4 or 5 weeks ago?

Aug 16 02:18 PM

[Jose Urioste:]

DavyJ, looking at inverses xx or xxx is not right. Should be aware their DAILY target, and... it's like 2+2=$, they don't work.
And kind of scary this crisis to be now bullish... greed

Aug 16 03:06 PM

[Jose Urioste:]

meant 2+2=4, same for inverse than bullish

Aug 16 03:08 PM

[jambo:]

Yep, makes perfect sense which is why it is not likely to happen "on cue".
This (erstwhile bull) market has a single common thread; it is a short killing mofo from jump.. and I believe, by design. Be reall careful out there folks.

Aug 16 11:35 PM

[Peter Cooper:]

Did I mention putting on short positions then? I think not.


On Aug 16 08:49 AM djk! wrote:

> I wonder how those short positions that people put in on 4/14/09
> after you declared an end to the *sucker's* rally are looking now?
> Ya think the market will "correct" enough for them to just make back
> the dough, much less a little profit? Hey Peter, predict this, Is
> it going to snow in Dubia on 12/25/09? Get it right and you might
> want to consider being a weatherman.

Aug 17 06:03 PM

[Seudo:]

Hey,
Thanks, I Immediately put more in when i read this last time.
Keep it coming.
Thanks again.

Aug 22 07:08 AM