Why You Should Always Be Short

by: Quoth the Raven

Right off the bat, let me clarify.

I don't mean that you should short only, and I don't mean that you should always technically even be short. What I mean is that it's important to always have a hedge. I do it through holding precious metals and holding individual equities whose fundamentals are out of whack short.

Having roughly 20-40% of my portfolio short with companies that could fail even in the most bullish of the bull markets is important. I'm talking about companies like Sears (NASDAQ:SHLD), formerly J.C. Penney (NYSE:JCP), Angie's List (NASDAQ:ANGI), and Pandora (NYSE:P) - as examples. Those companies don't need help to fail, they've either already done it or are so far overvalued, in the case of Pandora, they're likely to pull back. They don't really have fundamental legs to stand on.

Having said that, let's move this to a macro market discussion and current events. Then, I'll tell you what one has to do with the other.

We've got a quite a little thing brewing with this Ukraine/Russia situation heading into Monday. For those of you who haven't been paying attention, Putin and Russia are adding to the civil unrest in the Ukraine by placing troops in Crimea over the past two days.

Seeking Alpha reported the news early Sunday morning:

  • Ukraine has put its troops on high combat alert, appealed to Nato for help and warned of war after Russian President Vladimir Putin received parliamentary approval to invade Ukraine.
  • Russia has effectively seized control of Crimea, which was part of Russia until 1954. Russian soldiers - although not identified as such - have surrounded Ukraine military bases in the province and taken over three major airports.
  • President Obama and other western leaders have spoken with Putin and warned him against further military intervention, with Obama making economic threats. U.S. legislators have condemned Russia's actions and have called for sanctions, but have stopped short of demanding military action.
  • The developments in Ukraine have troubled but not roiled global markets so far, although the country's main stock index and currency have been hit badly. Gas and oil are a particular focus given that Ukraine is a key east-west energy route.

We saw the markets get jittery last Friday when some of this news started to spill into the mainstream:

And it wasn't even until a little after 4pm on Friday that the President came out and addressed the issue, vaguely dancing around the fact that there could be repercussions should Putin continue to try and occupy Ukraine or not allow them to govern themselves.

The President also met with Putin yesterday, as the world looks on and tries to do the diplomatic thing for the benefit of Ukrainians. However, as of 8:45CST this morning, the headlines weren't looking much better:

(click to enlarge - cnn.com)

No doubt, I'm expecting Asia and European markets to get riled up after this news and shed gains as we look forward to what the trading week in the U.S. will turn out to be like. Additionally, you now have commodity items like natural gas and oil that are going to be used as bargaining chips between countries, which could have an adverse effect on the global price of those commodities.

But the title of my article, "Why You Should Always Be Short," I'm sure is being misconstrued by some of you. What I mean is that if you're holding companies fundamentally short at all times (aside from your long positions), you're effectively doing two things:

1. Placing a calculated bet on the fundamentals of a company that it'll go down. If it does, you make money.

2. Buying broad market protection in the case of the macro markets getting spooked - specifically from something like this type of event coming out of nowhere.

Sure, we knew there was civil unrest in Ukraine, but the developments of aggression happened from a Friday night to a Sunday morning; no one has been able to trade the U.S. exchanges in that time, so if you're not already holding something short, you're likely to get clipped in the morning when I'm guessing the futures will dictate an unceremonious opening.

Take this as a learning experience as to why it's always important to have some sort of hedge. Shorting is just as crucial to making a market as buying and holding is, despite what a lot of people say about it. It's a Darwinistic market, and you should be able to bet both sides of the coin on companies.

Having said that, no one likes global unrest of any type. Here's hoping this situation gets cleared up, and best of luck to you and your investments in the coming week.

How You Can Trade Volatility:

  • Go long volatility ETFs, like (NYSEARCA:VXX)
  • Buy ETPs that track the VIX, like (NYSEARCA:UVXY) and (NYSEARCA:CVOL)
  • Buy VIX call options
  • Buy call options for (VXV)
  • Buy S&P VIX Mid-Term Futures (NYSEARCA:VXZ)
  • Buy S&P 500 VIX ETF listed as (VIXS)

Other ETFs for Monday

  • S&P Emerging Europe (NYSEARCA:GUR)
  • iShares Emerging Markets Eastern Europe (NYSEARCA:ESR)
  • iShares VIX Short-Term Futures ETN
  • iPath S&P Crude Oil ETN (NYSEARCA:OIL)
  • ProShares Crude Oil ETN (NYSEARCA:UCO)
  • Velocity 3x Inverse Natural Gas (NYSEARCA:DGAZ)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.