How You Should Be Positioned Over This Weekend

 |  Includes: SPY
by: Convex Strategies

Well, that was pretty uneventful.

After Ben Bernanke's testimony, investors were definitely left with a sense of shock, as nothing particularly new was hinted at. Instead, it appears we are entering a period where central banks try to pressure politicians into restructuring their respective governments and freeing up the economic environment to stimulate organic growth.

In other words, market participants are slowly realizing that while the central banks will be there to print if market conditions deteriorate to critical levels, the era of endless QE is over. The incremental effectiveness of programs like LTRO and QE have worn off, and the Fed is no longer willing to risk potentially harmful inflation for little if any improvement in labor conditions, while the ECB no longer wants to accept risky collateral for their three year loans. Additionally, as already noted, the Fed and ECB would also like to hand the reigns over to their nation's governments to free up the economy.

This realization will become more widespread over the next few trading sessions, and on Thursday night with the Asian markets down almost 2% (even after the Chinese rate cut), global markets are starting to price this in.

How Is The Big Money Positioned?

As I wrote in one of my recent articles, it is clear that funds were largely prepared for a doomsday scenario in which the Euro would slide under $1.20, and US equities would fall another 10% or so. However, after Wednesday's absolutely euphoric rally (based on the premise that Big Ben would ease, nonetheless), traders seem a bit more balanced and the risk/reward profile has shifted in favor of those who are short. It seems reasonable to believe that a significant portion of institutional traders covered or even went long on Wednesday, and are now going to get out as quickly as possible after a disappointing Fed talk.

Thursday night US SPX futures, along with Asian market performance, are foretelling of a burgeoning eagerness to get back on the short side of this market.

Risks For Longs And Shorts Over The Weekend

For longs, the biggest risk is actually more worries about the Chinese economy. Retail sales and industrial production figures come out on Saturday, and I expect these numbers to show an acceleration in economic decline. Additionally, the aforementioned scenario whereby traders attempt to sell and even reinitiate short positions stemming from a lack of new easing is likely to pick up as early as next Monday. A Spanish bailout is essentially impossible at this point. The banks alone need at least $50 billion to stay afloat, and $90 billion is needed to clear up the whole banking system.

On the short side, the only significant risk is that the rumor mill gets chugging hard again, and Germany starts talking about something like Eurobonds or a coordinated bailout of Spain. However, these are tired rumors and with the market stabilized for the time being, institutions don't have a lot of pressure to do something drastic.


With a huge 300 point rally based on QE3 hopes yet to be retraced, traders should be compensated nicely next week for holding short over this weekend. Shorting the SPY (NYSEARCA:SPY) is the simplest way, and futures traders should be selling the ESMs and YMMs (Dow Minis).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am short S&P Futures