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!

If you're not yet subscribed to our new (and free) daily newsletter, The Contrary Investing Report, you can request a free subscription here. 

I'd highly recommend this, because we post articles and news throughout the trading day!  All this and more on our new site: http://www.contraryinvesting.com/

 

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

Well I'll Be Damned...The S&P Hits a 17 Month High(!)

Stocks continue to defy gravity, as the S&P finished today at a 17 month high.

Amazingly, the S&P has completely retraced it's most recent drop from January. The markets swung from quite oversold, to quite overbought, within the span of a month.

Once again, we learned (the hard way) not to bet against the S&P when it's north of the 200 day MA.

(Source: Yahoo Finance)

Where to from here? Well markets are overbought, and stocks have been rallying largely on low volume, so it's hard to see them going much higher before we see some sort of pullback.

Of course I'd have said the same thing a week ago, so take it for what's it's worth.

But I think the interesting thing to watch will be the conviction the upcoming pullback displays.

China, one of our favorite leading indicators, is NOT following the S&P's lead, however.

China on the brink - a potentially bearish divergence.

This could be a significant bearish divergence. The posterchild of the Reflation Trade, running out of gas!

As we always remind ourselves, the last time the markets crashed, China peaked before the US. History could be repeating itself here, as the US markets hit new highs, while China languishes below it's October highs.

Jim Grant's Early Dollar Requiem; Bob Prechter on Munis; Dollar Turns Up

On December 5th, I bookmarked Jim Grant's Op Ed for the Wall Street Journal entitled Requiem for the Dollar. I had meant to blog about it, but got busy, and it actually worked out for the best, as we now have 15 days of trading hindsight since the op ed was published.

I should first do the obligatory expression about how I think the world of Jim Grant (I actually do). He's a great investment mind, and a truly eloquent writer. But this is a good lesson on why you should always read the financial news with a skeptical eye, no matter how convincing the argument for one scenario or another will be.

As you can tell by the title of Grant's piece, he's not enthralled with the buck's prospects, and kicks off the article with some ominous lyrics:

After a glorious run,

Has the greenback become

The General Motors of currencies,

Hobbled by bad management?

I personally agree with all of the points Grant makes...save for perhaps the timing of his call.

Ironically, while Grant and fellow WSJ readers were mourning the passing of the dollar, the buck itself was kicking off a megarally:

Somebody forgot to read Grant's article to the US dollar.

(Source: Barchart.com)

Of course, no market goes up or down in a straight line. But perhaps, for the time being, the dollar may already have all the "bad news" priced in.

Another great example of why it's so dangerous to use the news to trade - the news usually lags the price action!

Related reading:

• Tom Dyson also believes the worst cased scenarios are already priced into the market for the dollar.
• In the news/trading action sequence spirit, Vadim Pokhlebkin explores whether or not earnings really drive stock prices.

Stephen Colbert's Investment Portfolio Recommendations

Earlier in the week, the Colbert Report did a fantastic spoof on gold. If you haven't caught it yet, check it out...it's absolutely hysterical!

http://commoditybullmarket.blogspot.com/2009/12/whats-in-stephen-colberts-investment.html

America's Top VC - Uncle Sam?

Come one, come all - entrepreneurs and investors alike - and pitch your business to Uncle Sam, the newest kid on the Venture Capital block!

Please exercise caution when reading this piece, as any free market loving individual may throw up all over himself or herself!

Robert Prechter: Run, Do Not Walk, From Munis

Bob Prechter's latest Elliott Wave Theorist popped into my Inbox Friday afternoon. It's excellent as always, and the good folks at EWI were kind enough to allow us to reprint a portion of Bob's analysis, which you can read here.

Prechter advises readers to run, not walk, from muni bonds...as he thinks local and state governments are toast!

One More Good Jim Rogers Interview

Here's another gem of an interview from Jim Rogers on the Closing Bell with Maria Bartiromo:

http://www.youtube.com/watch?v=4HkbS4aDCU0

Hat tip to The Daily Crux for the tip on this interview. And enjoy the hilarious Tiger Woods quip!

Positions Update - Holding S&P Puts, Waiting for Long Dollar Re-Entry

On Thursday, I took advantage of the market dip to close out both S&P shorts. They had to be closed out or rolled anyway. Both positions were closed at a loss, but I was fortunate to get a down day to sell on.

Still looking for a re-entry point into the dollar trade, which I basically got "margined" out of. I would have preferred to hold the position, rather than time the exit and re-entry, as I believe the trend has now changed (finally).

And I'm still holding the S&P 1050 puts, which continue to shed value. But, I think the risk/reward of holding them here is quite favorable still.

Another strong week for the dollar!

(Source: Barchart.com)

The S&P continues to defy gravity - but its time may be limited, if the dollar has indeed put a bottom in.

(Source: Barchart.com)

Open positions:

Holding 2 January 10 S&P 1050 Puts.

Current Account Value: $19,235.14

Cashed out: $20,000.00
Total value: $39,235.14
2009 Returns: Ugh, too depressing to calculate right now...

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000