Short Ideas For The Rally Non-Believer

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Includes: AA, AIG, AMZN, ANRZQ, BAC, C, CLF, CNX, DIA, FAZ, FCX, FXE, GS, JPM, MCPIQ, MS, NTR, SIRI, SKF, SODA, TLT, TMF, WFC, XLF
by: Bill Maurer

Since it hit a new 52-week low last Tuesday, the Dow Jones Industrial Average (NYSEARCA:DIA) has rallied 1,050 points. Yes, I said one thousand and fifty points. Fears over a US recession and European financial collapse have calmed down, and we've been off to the races. Many, like me, are skeptical of this rally. It's not that I don't believe things are getting better, I'm more skeptical of how much we've jumped in just a short time period.

Last week's jobs report, if you take out the 45,000 striking Verizon workers added back, was basically in line with expectations. 58,000 new jobs a month is not going to help the workforce, and in fact, over time, if we stay at that rate, the unemployment rate will rise from the 9.1% it is currently. And so much for the weekly claims finally getting back under 400k, the 391k was revised higher like the revisions each week are, and last week was back above 400k. I won't be positive until we get 6-8 weeks in a row under 400k, and right now, we can't get 2 in a row.

All that being said, I've got some short ideas for those who believe that we will either give up all of these gains, or at least take some profits in the next few days or weeks. My first idea has to be the most logical choice, anything in the financial sector. The Financial Sector SPDR ETF (NYSEARCA:XLF) is up 13.52% since last Tuesday's low. And if you take a look at the following table, you'll notice that the seven names I've outlined are all up more than that. Can someone tell me how Bank of America (NYSE:BAC) is worth $12.5 billion more than it was just five days ago? Have they solved any of their problems? They haven't, not yet anyway. This stock will go lower.

In the past week, earnings estimates for JP Morgan (NYSE:JPM) for the current quarter, full year, and next year have come down. They report this week so we'll get a good idea of how well they are actually doing. Take a look at the estimates for Goldman Sachs, they've been slashed in the past week. But banks have no problems, so Goldman is up almost 15% in five days. Morgan Stanley (NYSE:MS) actually saw its credit default swaps numbers increase on Friday despite the stock rally. People have been questioning its survival for weeks.

AIG (NYSE:AIG), Wells Fargo (NYSE:WFC), and Citigroup (NYSE:C) have also rallied in suit. You could short any one of these individual stocks, but if you want some added firepower, you could buy the double short Proshares Ultrashort Financials (NYSEARCA:SKF) or the triple short Direxion Daily Financial Bear 3X Shares (NYSEARCA:FAZ). The Direxion ETF has gone from 81 to 55 in the past five days, so you can tell financials have really moved.

Name Ticker Recent Low Monday's Close Change
Financial Sector SPDR XLF $10.95 $12.43 13.52%
Bank of America BAC $5.13 $6.37 24.17%
JP Morgan JPM $27.85 $32.30 15.98%
Goldman Sachs GS $84.27 $96.70 14.75%
Citigroup C $21.40 $27.84 30.09%
AIG AIG $19.18 $22.37 16.63%
Wells Fargo WFC $22.61 $26.05 15.21%
Morgan Stanley MS $11.58 $15.39 32.90%

Just as the financials have rallied on the Europe news, the metals and minerals companies have soared as fears of a US recession have calmed down and global growth may actually be on track. This in turn has led to a rebound in metals prices, and the stocks have rallied sharply (see the following table). A couple of troubling points, however.

Potash (POT) was upgraded yesterday morning, on a valuation call, after it had bounced 13% off last week's low. Why did the analyst upgrade it on valuation at $45 when it was down at $40 last week? Something's wrong here. Freeport McMoran (NYSE:FCX) has jumped with copper back at $3.30, but copper won't stay high for long if recession fears come down. Both Freeport and rare earth processor Molycorp (MCP) will come back down this week if metals prices retreat or if Alcoa (NYSE:AA) falls on its earnings report this afternoon. These names tend to trade in tandem, despite their different businesses.

Coal companies Alpha Natural Resources (ANR), Console Energy (NYSE:CNX), and Cliffs Natural Resources (NYSE:CLF) have all bounced more than 25% off last week's lows. I recently covered these names, and cautioned people before this latest rally not to get in yet. Alpha Natural has seen its 2011 and 2012 earnings estimates cut by more than 50% in just the last 3 months, and I would not be surprised if those come down further. Although Console and Cliffs Natural have not seen as many earnings cuts, these names have rallied extremely hard and are due for a pullback.

Name Ticker Recent Low Monday's Close Change
Alpha Natural Resources ANR $15.49 $20.71 33.70%
Molycorp MCP $29.19 $35.86 22.85%
Freeport McMoran FCX $28.85 $35.45 22.88%
Console Energy CNX $30.56 $38.45 25.82%
Cliffs Natural Resources CLF $47.31 $61.02 28.98%
Potash POT $39.54 $48.04 21.50%

There are a few other names I'll mention that might make a good short case right now. Sodastream (NASDAQ:SODA) has bounced 35% in the past 5 days, and once the short sellers get control of it again, it will most like drop back towards $30 or even $25. Sirius (NASDAQ:SIRI) is also up 30%, and bounced 8% yesterday, despite being downgraded. Amazon (NASDAQ:AMZN) is up 17% during the recent rally, and despite good numbers from the Kindle Fire so far, I still question the company's extremely lofty valuation. They need some EPS improvement.

For anyone believing Europe is still in trouble, the CurrencyShares Euro Trust (NYSEARCA:FXE) has bounced 5 points in the last few days and would be a nice short. Also, with markets bouncing, Treasuries have sold off, as the iShares Barclays 20+ Year Treasury ETF (NYSEARCA:TLT) has dropped nearly $9.00. For anyone wanting to get into the long treasuries, the 3 times levered Direxion Daily 20+ Year Treasury Bond ETF (NYSEARCA:TMF) might be the best way.

I've given you a bunch of names here as some of these may not be able to be shorted currently, or you may disagree with me on a particular stock here or there. One thing is certain. These names have rallied extremely hard in the past few days, and the markets are extremely overbought right now. Remember though, shorting stocks is not right for everyone, and carries more potential losses than a normal investment. Always do your own research before getting short, or starting a long position in a short based exchange traded fund.

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