There are much easier ways to make money than shorting SPX. Maybe it is just hubris or the fact that it looks like a huge bubble, but the allure of shorting the SPX is always there. Most of the time, that allure should be resisted, because the odds are against you, and the money flows are against you.
After a long break from not shorting the SPX, I came back into it at the end of the year, expecting an early January selloff. And it tried on Monday, but the forces on the buyside are quite strong, stronger than I expected. I don't put too much weight on one day of trading, but it does have a marginal effect on my view. I have less conviction today than I did at the end of last week just because of the way it bounced back so easily from that intraday drop and effortlessly has gapped up to a new all time high. That's despite the bond market acting quite weak at the start of the year.
I am still short, but will not add, and I'm probably going to reduce the position to match the lower level of conviction I have about a short term pullback. I'm still favoring a pullback within 2 weeks, but probably a much shallower one than I originally expected, perhaps down to 4700 before making another quick bottom and going to 4900+ by February. And it could easily just grind higher from here without a pullback and keep going higher. That is the risk scenario for the short.
In hindsight, it seems like the Omicron flush out in late November/early to mid December was enough of a purge to clear out the weak hands and set the stage for another multi month bull move higher. I doubt we see another trip down to 4600 this month. The weakness in bonds is the biggest reason that I'm still short. If bonds find a bottom again around 1.65-1.70% 10 yr yields, then we could see another grind up higher. The only way stocks will have a sustained drop is if the bond market doesn't provide that negative correlation hedge vs. equities during corrections. We are getting closer to that scenario as the Fed moves on from supporting markets to trying to keep inflation from getting out of control.
I underestimated the bull side again, their eagerness to put more money into TSLA and AAPL and not bitcoin and meme stocks shows they're becoming pickier about where they pile into. The group of stocks getting the money flows is shrinking, much smaller than early 2021, and with the flows into equity funds still high, it leads to big up moves even in the mega large caps like TSLA and AAPL, even though fundamentals are getting worse. This behavior is consistent with what happens at the final stage of a bull market, as prices disconnect from fundamentals and investors pile into a small group of names which are still outperforming.
The other day, I even heard an investment "expert" mention AAPL as being an attractive alternative to investing in Treasury bonds, as far as safety and capital preservation. You know that you're very late in the bull market when you start hearing things like that. But that's not going to help anyone in their day to day trading, just something that caught my attention and puts things into context about what stage of the bull market we are in.
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22 comments:
Only put options.
And Nowhere alternative.
Holding on to spy, dia and qqq puts for Jan. Big position but not trimming just yet - I see a high chance we get a very big 1-2 down days pretty soon. thankfully my long recovery stock positions have kept things from getting too ugly as s&p keeps moving higher
I reduced my position today, took a bit of a loss and we'll give the rest of the position a few more days to play out. If we don't get the down move by the middle of next week, will close it out and wait for the next trade. I have a trade lined up but waiting for it to setup for a better entry.
I plan to hold till Jan 21 unless I get a great exit. too many risks to market moving higher now. May add on a big move up for Feb. This is the quarter when market will realize many things - high valuations, rate hikes, inability of companies to maintain margin as inflation ticks up. still holding a combo of puts on spy, qqq and dia
Agree the high valuations, rate hikes, shrinking profit margins, etc. will be a cloud over the stock market all year. At this point, its a game of musical chairs and most investors realize that they are facing unfavorable fundamentals in the next couple of years but the past 12 years of a relentless uptrend have made staying heavily long US stocks the default position for most fund managers.
Something is going to break, but tops are tough to time so its not going to be easy to profit off the downside in short term puts. I do see a lot of potential in some long dated (Jan 2023 exp.) put spreads in some of the most egregiously valued stocks like TSLA, NVDA, and even AAPL. But I think I can get better levels to enter in February/March so waiting for now, but that opportunity is more forgiving when it comes to timing although less gamma and less bang for your buck than short dated options, but a bigger time window and probability of profit.
Finding leaf options and long-term spread.futures trading is too hard in this time.
Stocks will never go down because prices will never go down. Watch In Time. Inflation is one of the best forms of populist control. Each dollar is worth less so unless dilution occurs each stock will be worth more in dollars.
I mean in the long run. Therefore shorting is playing the game with the worst odds in the whole damn casino.
Shorting SPX I agree with to a certain degree, but shorting shitcos and companies that can't support their stock is a different story. How did the Chinese stocks from 2008 to 2021 as their M2 money supply went up over 5 times? Stock prices are determined by supply and demand, and unless the US goes full Zimbabwe, companies that can't buyback their shares and rely on suckers to pump up their values (TSLA, etc.) will eventually find their natural level, at lower prices.
Inflation was high in 2007 and 2008 and the stock market got cut in half.
This is anonymous 1 :). I agree with @marketowl. shitcos and short term shorting can work and will work. i started trading in 2006 on the short side, traded long all these years and now back to square one. shorting is the right strategy once every 5/10 years and 2022 might beat 2008 imo
anonymous 1 - I trimmed spy short by 1/3rd and qqq short by half. left dia short untouched. tad early to cut so much but want to be ready if get a big move up again. still quite short
Reducing my position yesterday was a mistake, and got to blame it on still being a bit stuck in 2021 mode of being reluctant to put on big short positions. It takes a bit of time to completely switch gears mentally, even if its easy to write about, harder to actually execute and change your approach on a dime.
A few more weeks to completely get out of 2021 mode and I'll be ready to put on size on the short side when things line up.
Also, will probably cover the remaining short if we can go down another 40-50 SPX points towards 4660.
you dont think we can go lower than 4650?
Would be really easy to cut more if we have a big gap down open tomorrow. always tricky during the day if it goes down slowly.
It can definitely go below 4650, but I am thinking risk reward and is it worth it to try to catch 50 more points of downside and risk getting stuck short if it V bottoms again around 4650?
Yeah a big gap down tomorrow would seem like a good spot to cover if it happens. Usually they don’t make it that easy for shorts.
I am hopeful of a gap down tomorrow am
did not really get the gap down. @marketowl would you hold the shorts for some upside or think it is already getting tricky? what does a very strong payroll number tomorrow do in your view?
I missed the dip in the morning to get out, was waiting for a bit more to cover. Yes, its getting to a trickier spot here, put call ratios are already fairly high, and I see lots of bears already on Twitter and CNBC. So yeah, if I my position was bigger, I would definitely be covering some today but since its not a big position, I am waiting for a bit lower, but if we get a selloff near the close, I will cover
ok thanks this is very helpful. will def reduce today whether or not we get another dip near the close
got out of all short qqq, spy and dia. might kick myself tomorrow but this is not a 100m race, need to be ready for dozen other trades and races and cant be greedy. Might give myself a day off tomorrow without any need to watch markets :) (never happens but good to know I can afford to)
I closed out the remaining short near the close and now flat and watching for a better spot. If we go a bit lower next week, will be looking to buy dips.
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