Summer is a Great Time for Shorts

Montreal, Canada

With summer approaching, it’s usually a good time to buy shorts. And I’m not talking about the kind you wear with a tank-top amid stifling temperatures.

Betting against the market – any market – is one of the hardest endeavors for even the most seasoned investor. More often than not, I’ve lost money on almost every put option over the past 20 years. Timing is everything with options.

Even the pros can’t short-sell consistently.

Equity hedge funds of the long/short variety, which comprises the bulk of the hedge fund industry’s assets, are poor traders and typically fail at short-selling in times of market dislocations. And most investors who speculate using put options lose money.

But as summer approaches, seasonal weakness for stocks and other risk assets arrives in earnest. This year might be especially volatile because complacency has gripped the markets with the VIX trading under 15 and now at 2007 levels. Investor sentiment is also the most bullish since last April and the number of bulls easily outpaces the number of bears, according to Investors Intelligence reports.

Finally, the Fed will cease QE II in June. The big $64,000 question is whether investors have duly discounted the end of the Fed’s liquidity parade in June? Bill Gross, the bond guru at PIMCO, doesn’t think so and is wagering that Treasury bond prices will fall.

Markets might indeed continue to race higher over the next few weeks as more investors jump aboard the rising trend, afraid to miss the gravy-train. But the summer is historically a bad time for the bulls and nowhere is this greater than in the commodity markets.

Silver is a prime short-sell candidate. Though I remain constructive long-term on silver, the metal has come too far, too fast over the last several months suggesting a massive pullback lies ahead.

The price of silver has gained more than 160% over the past 12 months and is up another 43% since the beginning of the year. SLV, or the Blackrock iShares Silver Trust, is now the world’s 12th biggest ETF. And the silver-to-gold ratio, which flashed a “buy” signal for my members more than 12 months ago — now reads the opposite.

I’m pretty sure silver prices will suffer a dizzy short-term correction before the summer is over. The buying has been mania-like, especially among individuals in India this spring.

Options are risky but might reward speculators with huge gains from now until June as prices possibly top $50 an ounce and then tank. The mining stocks in this sector appear to be fully valued and have started to weaken, suggesting they don’t believe the ongoing advance will last. I don’t.

My Commodity Trend Alert (CTA) service has started to bet against a silver mining company using cheap put options. Silver is just too dear at these levels.

I’m off to the Sovereign Society’s Offshore Advantage Panama conference this morning. I’ll be back next Monday. Have a good week.

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