While the stock market is well off of the 2011 lows set in August, the market is by no means a sure bet going forward. While longer term, I believe the stock market is pretty unloved and over many decades I expect the markets to rise 5% or so per annum at the very least. In the short run, however, I see many stocks that I would consider short selling here and while bargains abound long-term investing can take, well, a very long time to pay off. By selling near-month or quarterly bear call spreads on these 6 investments, investors can make some serious money for current income needs even if a bull market should set in for stocks in the very near term, which I believe is rather unlikely given the moving parts involved in the European crisis in the modern age of global sovereign debt realities.
With the shaky economy not showing a whole lot in the way of green shoots, investors may consider selling call spreads and buying put spreads (I would be selling near-the-money calls and buying out-of-the-money calls and would be buying in-the-money put options and selling at-the-money put options or simply selling near-the-money call options and buying calls at a 30% premium to current prices instead of directly shorting something). When shorting index funds, it often pays to do your business rather quickly. When you are sitting on profits, feel free to take them off of the table.
LNKD -- We have been bearish on LinkedIn ever since the IPO skyrocketed to $125 or so on the day of their initial public offering. The trouble for us was that LinkedIn is a great tool for business people and can be tremendous for sales people trying to generate leads and closings, the average consumer will likely only visit the site every month or two. In fact, when researching further into LNKD we found that LinkedIn's average user visits the site less than once each month. With the stock currently worth 6.42 Billion and with the PE ratio at 910X earnings, now may be a great time to sell call options against LinkedIn. Investors can sell the March 2012 $70 call options on LNKD for a whopping $6.30 or so per contract, which is nearly a 10% return on your risk on the $65 stock, and you receive a substantial cushion against losses that you simply don't get from directly shorting any other type of security. Time decay is something we want to have on our side over the long run. Obviously, with this or any options strategy, you have to be right on the direction of the stock or you will lose money instead of profiting.
AMZN -- Another stock that has been extremely overvalued in our view in the recent past is Amazon. Although we don't see an immediate crash ahead for the stock ala shares of Netflix (NASDAQ:NFLX), Amazon still faces a ton of valuation and political risk from the state sales tax issues, which are currently tied up in the court system. Though I expect AMZN to lobby ferociously, at 95.5X trailing twelve month earnings, any slight mis-step will send these pricey shares into a tailspin. Because Amazon is a very low margin business, if the company loses market share or if growth plateaus the lofty PE ratios may contract and the stock price may decline to a level that adjusts for a new business reality. For now, Amazon maintains a fully fortified top level position of strength in consumer retail. The question going forward is whether this position will remain fortified by the state sales tax loopholes it exploits as one of AMZN's core competitive advantages..
IWM -- The Russell 2000 has come down quite a bit since the start of the sell-off in August, falling from $85 to $72, or a decline of 15.3% since August 1st. A wise strategy may be to continue selling bear call spreads on IWM. Personally, I would consider selling the Feb. $73 call option for $3.50 or so per contract. This allows investors to profit nearly 2.5% per month if the IWM stays flat or declines. If the IWM rises by over 5% between now and Feb. you will be short the IWM from that point forward. With the Russell trading at 19X earnings, I think this is a decent way to gain some short exposure. If you are extremely risk averse, consider buying the Feb. $80 calls to hedge your risk. Those options will cost you $.85 cents out of our $3.50 in premium. This will place your potential gains at around 1/3 less than your maximum potential loss.
TZA -- The Direxion Triple Leveraged Daily Russell 2000 Bear Fund is a good tool, for astute short sellers in my view. The fund is down over 40% in the past year even though the Russell is down a bit from this time last year. Because of slippage, leverage costs, transaction costs, etc. Shorting this fund as a pairs trade against a TNA short looks like a pretty smart trade. To make this a more secure trade, consider buying a deep-in-the-money put option on this and on TNA at the same time. If the markets go against you, traders have to adjust when shorting both but not so with buying long-dated, deep-in-the-money put options on both of them because your risk is defined by the amount you pay for the deep in the money put options.
TNA -- The Triple Leveraged daily Russell 2000 Bull fund is also bad at creating long-term wealth for owners. While short-term traders can make a great living trading this vehicle, it is not meant to be a long-term solution for investors. Shorting the TNA is a gutsy, volatile way to make money. I suggest buying a deep-in-the-money put option on both TZA and TNA and I would also recommend buying this straddle and forgetting about it. Over time, this pair trade should be a huge success if the past is any indication of the future in these funds.
VXX -- The VXX tracks the CBOE volatility Index but in my view it doesn't do a very good job over the longer term. Case in point, the returns since 2008 on VXX is, well, unimpressive. The fund declined from $407 to $39 over that period of time. While I would not short this outright, for those who are short the market, consider selling a VXX call option or bear call spread for a hedge.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.