Why I'm Covering Some of My Short Positions

On Thursday, I liquidated a small portion of my The-Economy-is-Going-to-be-Weaker-for-Longer-Than-You-Think Trade, which supplanted The-End-of-the-World Trade after the Bear Stearns (BSC) bail-out.

I sold some of my gold and my short positions in emerging markets, via sales of the UltraShort MSCI EAFE ProShares ETF (EEV) and the Dow Jones REIT ETF, (SRS), though I still hold most of my positions in all three. 

Over the past few weeks, I have been increasing shorts on Canada, via ownership of the Horizons BetaPro S&P/TSX 60 ETF [HXD.TO], and small-cap stocks via the ProShares Russell 2000 UltraShort ETF (TWM). 

Concerning the latter, I could not understand how the Dow and the S&P could be rolling over while small caps continued to hold.  If the economy and the credit markets are worsening, then small caps should sell off more, not less. 

And over the past few days, they have. I expect small-cap relative performance to worsen as the market continues to fall.

Last week and yesterday, I did scale back my dumbass semis purchase, although I will look to re-enter at lower prices as the chips approach valuation lows.

In yesterday's session, the Dow broke to levels that the index had not seen since 2006, while the S&P500 approached the year's lows.   After stocks rolled over in the fall of 2000, on three occasions the market declined further after hitting new 52-week lows.  Upon breaking those lows, the S&P 500 fell another 13%-18%.  History may play out in a similar manner over the immediate future.

I would not be surprised if we have a violent sell-off over the next few weeks then bounce into earnings season.  I intend to continue lightening my short positions into this sell-off.

Disclosure:  The author owns SRS, TWM and EEV.

Comments

[pitaking]

I've been long the SDS for a few weeks and that trade still works, up over 3.50 today, Dow broke new lows today, S&P and QQQQ will follow soon.....we have a long way to go before we reach bottom.

[guliamo]

Market has been terrible in the past week and they say Friday could be the rotten icing on that cake..
the thing to remember is that these bad phases usually end with massive hikes.. so don't get your money out, just make sure you're in mid cap companies with a clear value chain, no debt and preferably having to do with basic materials, energy or tech - seems to me like these sectors will best weather the storm.
Happy trades everyone.

[Incae]

This is the reason de russell has not fallen more
Russell 2000 adds 34 materials, processing stocks, 21 companies the sector removed from index

[squashnut]

Good timing. It looks like you cashed out of srs at around 99. Now it's at 110.

[Ames Tiedeman]

Short everything. We go to 10,000 on the DOW.