Shorting Dow at 10,000 like the Battle of Rorke's Drift

It was in 1879 in the Anglo-Zulu War that 139 British soldiers managed to successfully defend their garrison at Rorke’s Draft against an assault by more than 5,000 fearsome zulu warriors.

Shorting the Dow at 10,000 is a similarly brave and stupid thing to do but if you believe steadfastly in your superior position then triumph against overwhelming odds is perfectly possible. At Rorke’s Drift 11 of the defenders won Victoria Crosses for bravery, and remarkably only 17 perished on the winning side compared to the wholesale slaughter of the losers.

Illusory strength

So is the Dow Jones at 10,000 really so awe inspiring? Its a bag of wind pumped up by the financial sector for its own preservation with nothing more than a dead cat bounce of a recovery to support it.

The zulu warriors looked impressive too but fell like nine-pins when it came to a fight. The Dow Jones at 10,000 is mighty over-stretched on any valuation yardstick, and a trailing price-to-earnings ratio of 140 dwarfs the over-valuation of late 1999.

Of course, the market could find another wind and blow its bubble a little bigger. But the rational argument is with the bears. The bulls need a real recovery to sustain their rally and there is no sign of it.

Consumer spending is falling. Credit is contracting all over the world. Trade is still down by a bigger percentage than in the Great Depression. Read Bill Bonner, he tells it much better than I can.

Shorts hedge risk

You need to be a Wall Street analyst to see anything positive in this data. So my money stays with the brave shorts waiting for relief to arrive. Some of us may still be left standing!

Of course, in the real world this is not the Battle of Rorke’s Drift and shorting is a way of hedging market risk which just has to be considerable at these levels. You can have some shorts on while still staying in the market.