Sunday, July 11, 2010

Why We Are Shorting The S&P Like Crazy - Thanks to This "Mini-Rally" Gift!

Here's your weekly investing outlook from - and even though commodities are likely to run into some serious headwinds in the short term, we're still firing away with some contrarian investing and trading ideas!

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Now for the week's lead story...

Why We're Short the S&P - Again - Thanks to This Mini-Rally!

Two weeks ago, we picked up a story courtesy of Bespoke Investments that showed just 4% of S&P 500 stocks were above their 50-day moving average - a level not even seen during the March 2009 lows!
So we thought a stock market bounce might be on tap - and sure enough, this week we got it.

Now after 4 straight up days, where do we sit?  We're now out of extreme territory - now with 29% of S&P 500 stocks above their 50-day MA.  To illustrate the relationship between this ratio, and the actual price of the S&P 500, I plotted both below for the year to date:

S&P Stocks Above 50 Day Moving Average
S&P 500 Price Chart July 8 2010

Of course this is a crude technical indicator, and one based on trailing prices at that.  But it has been effective at identifying extremes - especially oversold ones.  Not as much during overbought situations (like February to April of this year).

So where to from here?  I still see this ship heading down (here's the big picture of "why").

But we could rally further from here.  We closed Friday at 1077 on the S&P.  A rally up to but not surpassing the June highs around the 1130 mark would keep our bear market signature of lower highs and lower lows intact.

But I don't think a run up to 1130 is likely.  We've retraced roughly 50% of the last decline at this point.  So we could go farther - but that is not required at this point.  We're already halfway there - this mini-rally is livin' on a prayer!

Bottom line: Any further price appreciation will certainly leave a bear like me licking his lips for a chance to reinitiate a nice, juicy short position!  So, we initiated a short position on Friday.

And if you're new to our "shorting the S&P 500" mini-series, you can get caught up on our trade history - and thought process behind the trades - in the Shorting the S&P 500 section on our blog. 

More Investing News...
Stock, real estate, precious metals OK...just stay clear of bonds!

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Look out below, global economy! 

The public fiscal train is hurdling out of control

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