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

Here's your weekly investing outlook from CommodityBullMarket.com - 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:

Source: StockCharts.com

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. 

http://www.contraryinvesting.com/

More Investing News...

 

Marc Faber's Latest Outlook and Predictions

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

More Deflation! Consumer Credit Declines

More than forecast - would you believe it?

The Baltic Dry Index is in Freefall

Look out below, global economy! 

Muni Bond Yields are "Breaking Out"

The public fiscal train is hurdling out of control

 

http://www.contraryinvesting.com/

When Should You Short the S&P 500? Some Recommended Price Targets

And when I say short term, I mean VERY short term!

We're in the midst of an overdue rally that was needed to relive this oversold condition...nothing strange at all about it.  Question is, how high can it go?

We explored this on our sister site ContraryInvesting.com, in an effort to figure out when it will be safe to short the S&P 500 again:

I did a quick back-of-the-envelope calculation – because markets are probabilistic, after all – to see where this retracement may end. For my calculations, I’m saying that this decline began at 1173 on the S&P, and ended at the intra-day low of 1040:

The magical retracement range you always hear about is approximately 38-62% of the previous move. This would put us somewhere in between 1091 and 1123.

Source: StockCharts.com 

We hit an intra-day high today of 1098, and we sit just a point below this as I type. So the next turn down could complete this move.

Let’s sit back and see what tomorrow’s trading brings. If we do indeed get a rally towards the top end of my 1091-1123 range – or better yet, all the way up to Clark’s 1130 target, we’ll be looking to re-initiate our short position, for what we anticipate could be a doozy of a next leg down.

Interested in shorting the S&P 500 too?  Here's our thought process and recommendations:

• Yesterday's stock market bounce was pretty lame - but it set up today's follow through
• Earlier this week, the S&P showed strong support at 1050 - so we covered the short position
• But we still see stocks heading much lower, and soon