With Thursday’s strong bounce in the equity market, I initiated an SPX put position with the S&P 500 (^SPX) at 1,171.
There are two main reasons to accumulate short positions at this stage:
1. Economic data will be horrible through October. The month of July that is reported in August was bad. In September, the data reported for August will be absolutely horrible. Given the general sense of panic in August driven by dramatic events in the U.S. and Europe and extreme volatility in the stock market knocking 15% or more in the value of many people’s net worth, investors, business managers and consumers will retrench spending in the month of August. This bad data will be hitting the tape in September. Therefore there will be a strong negative bias toward the market at least through late September.
2. Technical condition of market broken. Extreme volatility is prompting investors to sell equities in droves. Mutual funds had very low cash positions heading into this crisis and they will be forced to liquidate aggressively as investors redeem their funds. Hedge-fund clients will demand redemptions as well. In this environment, all significant rallies will be sold.
In my view, the market has potential to rally up to the 1,220 area. If that occurs, I will increase put positions.
In the meantime, I have a strong short position on long term Treasury bonds expressed through a short of TLT and longs in TBT and SBND.
Ultimately, I believe the market will probably test and penetrate recent lows near 1,100 on the S&P 500 and lurch toward the 1,020-950 level discussed in this article.
Beside the broad stock indices, traders and investors may consider short or put positions on commodity oriented stocks or ETFs such as Freeport McMoran (NYSE:FCX), IDEX (NYSE:IEX), DBC, GSC, XLB or IYM. As discussed in this article, fears of a substantial slowdown could devastate commodity markets and commodity producing stocks.
Short-term risks to this short position include announcement or speculation surrounding potential coordinated global central bank actions as discussed here and here. For this reason, puts and/or put spreads are the ideal vehicle for expressing a negative outlook on the market given that risk is limited.
Many equities such as Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC), Google (NASDAQ:GOOG), AT&T (NYSE:T), Verizon (NYSE:VZ) and Vodafone (NASDAQ:VOD) and even some financials such as XLF and Goldman Sachs (NYSE:GS) represent interesting long-term value at current levels. However, I believe that all of these stocks will be available at significantly lower levels over the course of the next few weeks.
Disclosure: I am short TLT.
Additional disclosure: I am long SBND and TBD. I am long Sept. 17 SPX puts.