Is it time to short the S&P 500?
The US stock market staged an impressive recovery from the lows of March but has been trending lower for the past three weeks. In bear markets this is a typical pattern, with another downturn due to follow. Should you therefore sell the market short?
Listening to Credit Suisse yesterday the consensus view is that the markets will shift sideways over the summer in a trading band and then renew their upward climb in the autumn. How realistic is this? Is this not what such folk said a year ago?
Recovery-free recovery
My own reading of recent statistics is not just that the market has got ahead of a recovery but that, apart from in financial markets themselves, there is no recovery.
The record 6.9 per cent US savings rate, lower consumer confidence, the 13th month of declining retail sales and 9.5 per cent unemployment. These are not the stuff of a US recovery, nor are declining house prices, rising mortgage rates and falling mortgage applications.
Just where is the follow through that says things will get better in the autumn or 2010 for that matter? Markets do always anticipate a recovery but there has to actually be a recovery in sight. It just does not seem to be there.
The best optimists can offer is that Asia has not been so affected. Well apart from Japan, the world’s second largest economy, dropping off a cliff, and Chinese exports slumping 26 per cent. Optimists reckon this economic ’strength’ will lead the rest of the world out of recession, but quite how is never explained.
Reality check
Is it not more likely that markets will catch up with reality again this autumn and that will be a big disappointment compared with current expectations? Then there will be another serious sell-off and if not a drop to new lows then something close to it.
Investors traditionally buy bonds to bet against a stock market crash. But the Fed does not now have much room to cut interest rates in a stock market event, and bond holders are worried about money printing by the Fed.
It might therefore be wise to short the S&P 500 directly rather than invest too much in bonds. We also saw last autumn that commodities and commodity stocks also plummeted with the crash, so again that alternative might be ruled out. How best to short the S&P 500 is thus the next issue to address.
A column in the South China Morning Post pointed out that shorting a rising tide of liquidity never worked. It is certainly difficult to judge the point at which the tide stops rising. But the acceleration into a price spike by financial markets is unsustainable – this price movement always is – and that ought to be tradeable.
Peter Cooper
July 27, 2009 at 2:36 am