Using ETFs to Get Short in this Volatile Market

I'm really not sure what I can add to what has been happening in the market lately, other than to say the market is going down.

As I have been saying on this site for some time, I think something "bad" is going to happen either this year, or next. I don't expect an apocalypse, but I think a 15%-20% correction is in the offing, and something may be happening right now.

A credit crunch is the bane of all markets. Without liquidity's oil to grease the markets, markets seize up, and that is what is happening now. Therefore, I will be selling rallies. We are so oversold that I expect a sharp rally. We had one on Wednesday, but that was iced by the news from BNP Paribas (BNPQY.PK). However, nothing has changed, and I will be selling when rallies occur.

It is a practical impossibility for me to liquidate my holdings. Besides, I still like some of my positions, and I do not wish to dump them. Plus, I am about 30% net long, and haven't been hurt too much. (Paradoxically, I had been getting ready to sell. However, a few positions have cracked so bad, that instead, I am a buyer of those positions on another down leg because valuations are getting stupid.)

I do not wish to part with my positions at these levels but would like to get net short. I cannot short stocks because of restrictions at work. Options premiums are rising, so I am not crazy on buying puts, and I don't want to sell options because you can get whipsawed pretty easily in this market.

So, how can you get short? I like these cool Ultra-Short ProShares ETFs. The Ultra-Short ETFs replicate short positions in the indices by a factor of two. For example, if you wanted to short $1000 of the Nasdaq 100, you would buy $500 worth of the Ultra-Short QQQ (QID).

At the moment, I am interested in these ETFs.

Real Estate:

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Commercial real estate is idiotically expensive. REITs could drop 40% and merely be at their average historical valuations. I am most confident shorting commercial real estate at the moment.

Industrials:

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Technically, it looks like the industrials have topped. However, I am wary because of the global infrastructure play. But if tightening credit is going to effect the economy, it will also effect infrastructure spending, at least in the near term.

Utilities:

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Utilities are expensive.

All three have been darlings of the MoMo crowd the past few years.

Also of interest are:

Financials:

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But the financials are deeply oversold right now.

Plus, I'm starting to do work on what I want to buy when the group is left for dead. I think a once in a generation buying opportunity will arise in the banks - that is will arise, not is arising. There is more downside left, I think.

This is the Regional Bank Holders ETF:

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And finally, small-caps:

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I would like to see the small-caps rally a bit before taking a position, though.

On the Disconnected Front, check out the Xinua China 25 iShares ETF which is a basket of Chinese stocks listed in Hong Kong.

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It appears to be rolling over.

Now look at the Shanghai Composite:

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It must be wonderful to be blissfully unaware.

I think we have a sharp bounce coming. I wouldn't be surprised if we closed strongly today, but at the same time, I also wouldn't be surprise if we collapsed on close today, either. I would be surprised, however, if all we did was meander during today's session.

But with volatility rising and credit tightening, it is a very, very good time be defensive.

Comments

[David Frenk:]

You're dead right about everything in this article.

2007 Aug 10 01:41 PM

[sean.k.conway:]

ProFunds are interesting too.

Sean

2007 Aug 10 03:52 PM

[Jim Glazen:]

By the time the idiots start to think about shorting the market after a big drop, that's almost always a sure sign that the bottom is in.

Short away.

2007 Aug 11 11:21 AM

[David Lentz:]

One never correctly expects an apocalypse. There is always an element of surprise in how bad things get.

Which is neither to confirm or deny your expectation of a 15%-20% correction. My own guess is 20%-30%, but that's just a guess.

The real bane of all markets is the erosion of trust, such that one cannot make reliable valuations of the "fair market value" of the item being transacted, whether it be CDOs, bonds, stocks or derivatives.

And chaos is the aqua regia of trust.

2007 Aug 11 01:24 PM

[mike:]

SP600 has been stronger than the Ru2000. Why choose it?

TWM, 2x inverse Russell 2000, was up 3% while the index was down 2%, and down 5% while the index was up 2%. Then, later in the day BOTH index and inverse ETF were negative. SDD was behaving simililarly. That's not good.

Small caps have underperformed on the way down, but they're also bounced harder.

2007 Aug 11 05:43 PM