Taking Off Some of the Fear Trade

Today, I liquidated a small portion of my The-Economy-is-Going-to-be-Weaker-for-Longer-Than-You-Think Trade, which supplanted The-End-of-the-World Trade after the Bear Stearns bail-out.

I sold some of my gold and my short positions in emerging markets, via sales of the UltraShort MSCI EAFE ProShares ETF, ticker EEV and the Dow Jones REIT ETF, ticker SRS, though I still hold most of my positions in all three. 

Over the past few weeks, I have been increasing shorts on Canada,via ownership of the Horizons BetaPro S&P/TSX 60 ETF, ticker HXD.TO, and small-cap stocks via the ProShares Russell 2000 UltraShort ETF, ticker TWM. 

Concerning the latter, I could not understand how the Dow and the S&P could be rolling over while small caps continued to hold.  If the economy and the credit markets are worsening, then small caps should sell off more, not less. 

And over the past few days, they have. I expect small-cap relative performance to worsen as the market continues to fall.

Last week and today, I did scale back my dumbass semis purchase, though I will look to re-enter at lower prices as the chips approach valuation lows.

The Dow broke to levels this session that the index had not seen since 2006, while the S&P500 approached the year's lows.   After stocks rolled over in the fall of 2000, on three occasions the market declined further after hitting new 52-week lows.  Upon breaking those lows, the S&P 500 fell another 13%-18%.  History may play out in a similar manner over the immediate future.

I would not be surprised if we have a violent sell-off over the next few weeks then bounce into earnings season.  I intend to continue lightening my short positions into this sell-off.

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