View: About That Top

About That Top

why this is a huge shorting opportunity

It's been nearly one month since I changed my overall stance from long miners to short the broader market (read that article here). While the S&P 500 is up around 30 points since then, both XLE energy and EEM emerging markets have severely underperformed which is why even after today I am still up over 3% overall since I turned bearish. Of course a far better strategy would have been to maintain my previous positions but the reality is that for the last month, not much progress either way has been made from my perspective.

With energy bulls still firmly above 80%, this remains an intermediate term sell signal in my opinion. The market has very little capacity for material upside until this overbought condition is relieved which can only be accomplished through a significant price correction. While this is a reliable indicator, it certainly does not mean the decline must begin tomorrow, next week, or even next month. It simply means the next meaningful trade is likely on the short side - I could have been less aggressive acting on this and perhaps done myself a favor by participating a bit more on the miner rally before going completely short.

On the other hand, I consider NYHL to be a stronger short term sell signal which nicely complements the longer time frame sell signal from BPENER. After today's mega rally, this indicator has surged to a new high for the year - the last time it was around current levels was 7/7/2011 (back then, that was also a new high for 2011) which marked a significant top. One month later, the S&P was lower by some 220 points. This is an extremely high priority sell signal and should not be ignored. Basing short term high leveraged trades like VIX calls or Sept/Oct out of the money SPY puts on this indicator is more than reasonable in my opinion.

I continue to think energy and emerging markets offer the best risk/reward for short positions, primarily due to their sensitivity to crude oil and risk-on currencies like the AUD which have already begun to break down from their August highs. I would focus on things that are significantly underperforming SPY as they will likely fall much faster and harder when the decline inevitably begins. Staying short for nearly a month hasn't been easy - patience and especially discipline have been required but I am happy to report that the bear case only continues to strengthen. The evidence strongly suggests we will see levels on the S&P 500 far lower than now over the next couple of months and I am positioned accordingly.


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