International Forecaster Weekly

Time Too Short?

The old adage on Wall Street is that the market climbs the steps going up, but takes the elevator down. It certainly does.

Bob Rinear | October 24, 2018

If you’re a typical “average” person, you might have a 401K or some form of individual retirement account. However, you 1) might not dabble in individual stocks, and 2) you might have never considered being on the short side of the market.

If you’re a younger person, that’s only seen the market go higher for the last 9 years, I almost understand that. But if you’re a more seasoned individual, you know that markets do go down, and often quite quickly. So, if you’re not playing both the long side and the short side, you’re missing out on a lot of opportunity when the big dump out hits.

Over the past couple weeks the DOW has gone from hitting an all time high, to being down 2,000 points from that level. (intra day on Tuesday) Now if you had it all right and somehow got short from those lofty levels, you made a tremendous amount of money in a very short period of time. In other words, look how long it took the market to go UP 2000 points.

On the tenth of July, if you started counting, it took until October 3, to gain 2000 points. But since October 3, it only took 14 trading sessons to LOSE 2000 points. Three months to gain it, 14 sessions to lose it.

The old adage on Wall Street is that the market climbs the steps going up, but takes the elevator down. It certainly does.

So the question is, why don’t more people play the short side of things? I’m going to answer that with a bit of a twist. Before the outright, in your face, banker backed manipulations of the last 10 years, even then…people didn’t do too much shorting. They heard it was dangerous, they heard that you could lose everything, they were told shorting is for the professionals. It was baloney then, and it’s baloney now.

However, it has been a death sentence to go short and hold onto it for any length of time since the big 2008 meltdown, simply because they’ve rigged this market to go up in the face of any and everything. So I can understand perfectly, any resistance to trying to play the short game over the last few years.

But the bottom line is still fact. 2000 points down in what amounts to 2 weeks is good trading if you caught it. I did NOT. When the market puts in single day drops of 800 points, one has to wonder if it will put in more downside, as that’s a pretty big move in itself.

However, while I didn’t catch the big downside drop, I didn’t lose any money either. I’ve been playing smaller position sizes and taking profits more quickly than normal, and catching some of the bounces back up.

Except for the two long side “Vegas Plays” we did, being short the 2008 housing/credit melt down was the most profitable year we ever had. Maybe I’m just dreaming, but I have to think that there’s another record profit waiting for us on the short side. The problem is timing.

In the 2008 situation, it was pretty obvious to see that a melt down was going to have to hit. We had people working at McDonalds buying 650 thousand dollar houses. We had people quitting good stable jobs, to go be mortgage originators. It was insane, there were fistfights on the front lawns of homes for sale, as people outbid each other. People were buying swamp land that could never be built on, hoping it was going to soar in value. It was a bubble.

That bubble popped. We knew it was going to and scaled into shorts, puts, and inverse ETF’s. But this time things are not so easy. Back then, we didn’t have a coordinated global central bank printing tens of trillions of dollars. We didn’t have Central banks buying individual equities. This time, we did. Since 2009, the role of the central banks has been to get the market up, and keep it up in the face of anything.

That can’t last forever. The signs are out there. Just last week I penned an article I titled “The melt down”, And how signs are pointing to some real market troubles. In fact, I wrote a piece on September 13th that shorting the home builders was probably a good idea. TOL was 36 bucks a share. It was 29 Monday. PHM was 25. It was 21 Monday.

So, if you were convinced that the market run was over, and while we weren’t going to crash, we were in for a protracted period of falling, what would you do? There’s bunch of ways to play the down side now. Yes you can outright “sell short” some stock. But you can also buy put options, and you can utilize the “inverse” ETF’s that go up, if the underlying asset (stocks) go down.

I didn’t think the market would do anything “too” drastic ahead of the midterms. I felt it would wobble sideways, but not get too far one way or the other. But that was wrong. When the S&P fell down to its 200 day moving average, and then used it as support for several sessions, it made you think that “okay, now we’ll bounce” off it. We did, for a session or two and then plunged through it. THAT I didn’t expect.

The old adage on Wall Street is that the market climbs the steps going up, but takes the elevator down. It certainly does.

So what about that question I asked in the title? Is it time to go short ( for more than a daytrade) or could they still send us higher again. Naturally I can’t tell the future, but here’s my thinking on it. November and December are usually seasonally strong, and that carries into the new year as the “January effect” run up. If the Republicans keep both houses, the market doesn’t have to worry about any of the things Trump has done being reversed.

If the US and China come to agreement on the trade tariffs, AND the Reps hold the houses, we could be looking at a situation where we get one last gigantic hurrah run higher.

But if the houses get split and China and the US can’t get together, I’m thinking that this bull market ends for good In late 2018 or early 2019. And that’s when I’d be looking at puts, inverse ETF’s and outright short sales.

Don’t forget folks, This market is very high. It could fall 5,000 points and we’d still have a 20K market. In other words, you didn’t miss the big money if a bear market evolves.

Brush up on short side techniques. They’ve been dusty since it has been suicide to go short over the last 8 years. But it’s time to sharpen up those tools. I’ll talk more about my favorite techniques in a future article or two.