Short ETFs: probably the very moment to buy, not sell
Posted on 27 September 2009 with no comments from readersHow interesting that Jim Cramer chose the end of last week to wage war against short ETFs just a day before investors filed a class action against the financial short fund SKF.
You just know this has to be a signal to buy the offending asset class. It is a neat contrarian moment backed up by some hugely obvious market information that is not a secret to anybody: stocks are massively overvalued in a historically far too long rally, and the traditional month for crashes is October, and we are almost there.
Going short
Now I can understand the anti-short ETF case. They can point to the poor tracking record of these ETFs at certain points, their very raison d’etre. And holding these instruments for too long is not recommended because leverage costs money.
However, if I look back at the past three months most of them seem to have done a very fair job of delivering a leveraged performance to their respective index movements.
So my guess would be that if the stock market takes a big lurch down in October then these instruments are going to be among the top performers, even if a few days out or not by exactly the right percentage. It is a no-brainer that shorting stocks is the best way to make a fortune in a crash.
That makes the timing of Cramer’s outburst remarkable, and probably more a matter of linking to the court action pending than the market outlook. It is a bit like arguing over small change with a 10-ton concrete block about to drop on your head.
Contrarian view
Perhaps too a little contrarian thinking might consider the third party arranging these ETFs. With all that negative karma in the investment universe will they not grab with both hands a clear opportunity to prove that yes they do track market movements, and can do so fairly well and enough to deliver massive profits.
What a way to demonstrate that their product not only has legs but can run and that it is the investors that have misunderstood them? Case dismissed!
Of course I am not a financial advisor and do not know the financial circumstances of any reader. But would it not be at least a fair point to argue that long ETFs are the ones to sell now, not the short ETFs?
no Comments posted by readers:
Some ETFs have done quite well in this last market rally. Those that bought FAS and UPRO did very well but those that bought FAZ and SKF along with EEV did quite poorly. While many lost a lot of money from their FAZ,SKF and EEV shares there are those that made a huge killing from their FAS and UPRO shares. It would be nice to now see FAS and FAZ either meet half way at 40 or even swap places to where FAZ goes to 80 and FAS drops to 20. Time will tell what this October will bring us. I’m still hanging on to my FAZ and SPXU shares. I picked up a lot of shares at around $40 recently of SPXU hoping that SPXU had hit bottom.
The ungeared ones may be legit. However it is unconscionable to recommend anyone put money into the 2x or 3x products.
It’s difficult to imagine the logic driving the individual who desires to borrow money to short the stock market, and also cannot afford a futures account.
The ProFunds UltraBear Inv (URPIX) 2x short S&P 500 is down 34% for the year, where it should be down approximately 26%. Very dangerous, even for holding just a few months.
One should not overthink this problem, the people selling these faulty geared ETF products are the same ones who sold fradulent mortgage products a few years back.
http://quote.morningstar.com/fund/f.aspx?t=URPIX (see the short term horizons on that chart)
Ed Note: No recommendations are made on this site, see my Legal Disclaimer section.
Cramer is a baffoon. I used to think he was funny. Now I think he is dangerous. He is opportunistic, very short-term in his views, and doesn’t care much about the future (of our children and grandchildren).
What’s wrong with shorting? If you allow bulls to buy on margin, you should also allow bears to short. This is what fair and efficient market is all about. Surely, we still believe in fairness?
You’ve been pushing shorting stocks since August 18 when the SPXU was at 56.57. It is opening today at $47.00. Great advice.
Ed Note: I have never recommended SPXU – of course if the market moves against you then no shorting position will work. You have to be patient and solvent enough to wait for the swing back.
Trading volumes were the lowest for a month on Monday 28th which tends to suggest the rally is finally running out of steam.