It's Time To Short The S&P 500 If You Think Economy Will Contract In 2012

Includes: SDS, SH, SPY
by: John Helzer

Trying to stand in front of a Santa Claus Rally and positive speculation about possible Eurozone fixes is risky indeed. But while we have been watching the headlines from Europe, global growth has been slowing dramatically across all regions of the world except the US. To illustrate this, I have plotted the JP Morgan Global Manufacturing PMI Index vs. the Economic Cycle Research's WLI growth and then the US, China, and Eurozone Manufacturing PMIs on a separate graph.

Note: the arrows on all graphs are the Economic Cycle Research Institute's public pronouncements on the US business cycle turning points.

Below I have graphed the Manufacturing PMIs for the US, Eurozone, and China. November's PMIs were US - 52.7, Eurozone - 46.4, China Official - 49.0 with HSBC China - 47.7.

Note: Although I did not graph the trend, Japan is also contracting:

At 49.1 in November, down from 50.6 in October, the Markit/JMMA Purchasing Managers’ Index™ (PMI™) signalled a renewed deterioration in manufacturing sector operating conditions. In addition, the latest index reading was the lowest in seven months.

- From press release 11/29.

With the global economy slowing rapidly, I see a real disconnect between the price of WTI oil and the world economy. But is the price of oil driven by demand or speculation?

Since I believe oil prices are driven more by speculation than fundamentals I shy away from trying to profit on any oil price movements. See the oil price spike in June 2008 below:

And last but not least is the S&P500. The slowing in global manufacturing activity since March of this year to November looks similar to what happened in the first half of 2008.

In summary if you believe like me, that the slowing world economy will cause the US economy to contract in early 2012, then a short position in a S&P 500 ETF such as (NYSEARCA:SPY) or a position in an inverse S&P 500 ETF such as (NYSEARCA:SH), and (NYSEARCA:SDS) might be appropriate.

Disclosure: I am long SDS. SDS is a double short S&P 500 ETF. 90% cash position other than SDS.