Stocks post fresh 10-month highs, hardly a buy signal
Posted on 21 August 2009 with no comments from readersWith global stock markets rebounding from the losses of earlier this week a few readers have expressed the opinion that this website called a market top too soon and that short positions are for experts only.
The former is obviously true but for how much longer? Anybody who buys at these levels is seriously mistaken surely? After such a long and strong rally a correction is not only to be expected, not to have one would be unprecedented.
Slow recovery
Are we actually heading rapidly out of the worst recession since the 30s? I don’t think anybody is talking about anything except a slow recovery, except perhaps the stock market whose rebound is saying we are back to business as usual.
In this context holding short positions is a natural defence against a downturn, and merely prudent and not at all foolhardy. The foolhardy thing to do is to stay completely long and exposed with no short cover when markets look high.
Of course I would draw readers to my legal disclaimer section and remind them that this website is for information only and should not be regarded as investment advice. What I can say is that my opinions are honestly held and not motivated by any thought of personal gain. I obviously do not move the market.
Short ETFs
Where caution should be exercised is with leveraged short ETFs – these should be held for short periods only when a change of direction is confirmed in the markets. Otherwise leverage works in reverse, as I have previously stated.
Then again you should never risk money in the stock market that you can not afford to loose. That of course is a controversial thing to say as many pensioners seem to have an unduly large amount tied up in the stock market.
The only answer is diversification, and shorting is one valuable way to hedge market risk. If an investor can not understand that then perhaps they should be paying commissions to professionals to think for them. However, taking responsibility for your own destiny is generally a better route in my humble experience.
no Comments posted by readers:
Peter:
Good “food for thought.”
At this point “in the movie”, one has to ask themselves the following question:
“With what I know about the stock market, the economy, the government’s market interventions, and the near term outlook, which scenario has a much higher probability than the other:
a) the markets will continue to rally, moving up about 5% more, or
b) the markets will likely zig-zag 1% or 2% up/down for the short term, followed by a continuation of the bear market decline.”
Back in May 2009, I covered my S&P shorts. Yesterday, I decided to short the market once again.
By Richard Fletcher, Executive Editor, Business
Published: 8:52PM BST 21 Aug 2009
Comments 16 | Comment on this article
So much for that old stock adage: Sell in May and go away. Stay away till St Leger’s Day.
The 2pc-plus rise over the last week means that we are now up more than 30pc since the market touched a low of 3,512 on March 3.
While the natural bull inside me enjoys watching the market tick higher and higher week after week, even I have to admit that this run is looking increasingly fragile with the FTSE 100 now trading on a price earnings ratio of more than 60, the highest level since 2002.
Yes, stock markets are forward-looking but it’s still difficult to reconcile Friday’s near 100-point rise with the dire public finance figures published on Thursday. The massive deficit was a timely reminder of how bumpy the road to recovery will be.
Usually a bumper month for corporation and income tax receipts, the Government ran up an £8bn deficit in July, as tax revenues collapsed and benefit payments soared, putting the Chancellor’s optimistic Budget predictions at serious risk.
Economists fear that government borrowings could now reach £200bn by the end of the year – some £25bn more than Alistair Darling forecast in April.
As Michael Ben-Gad, deputy head of economics at City University, so eloquently put it on Friday: “Whoever gets into government next will have to make very large cuts in services and also raise taxes. You’ll end up with US levels of services and Scandinavian levels of tax.”
Not surprisingly even the most bullish are getting nervous. Only last week Crispin Odey – the founding partner of Odey Asset Management who made tens of millions on the way down for clients and then repeated his success on the way up – warned of a pull back.
This rally, I fear, may have run too far.
Important to remember that the initial drop from 1576 to 666 was actually swifter and deeper compared to the drop in the 1930’s. The financial system is probably less stable than back then, thus we see ever more extreme moves in all markets.
The index price in my opinion is only part of the equation, you don’t mention implied volatility, the price of the insurance premium. Stocks have not recovered all what they lost in the 2008 crash, but the insurance premium is back at mid-2007 levels.
Current conditions are perfect to lure in anyone who is inclined to buy stocks. When everyone has had their fill, that’s the moment where no-one is left to sell to, and the pyramid collapses anew.
Short ETF’s are dubious, why not just short the SPY or buy PUT options?
>> In July Finra warned brokers they should closely supervise sales of the instruments, many of which it called “typically unsuitable for retail investors” who plan to hold them more than a day.
http://bit.ly/O5bGb
Now they are expecting $100 oil by the end of the year. If this is true then this will help Dubai’s and Abu Dhabi’s stock markets which tend to follow oil. With oil on its way to $100 how on earth can the market in the US crash or correct from its current high..??
This invisible hand is no longer invisible in our markets.
http://www.marketwatch.com/story/new-york-fed-buys-7-billion-in-treasurys-2009-08-17
Ed note: oil dropped to $32 last fall – in a big sell off that could well happen again