Tuesday, May 15, 2007

Time to Double Short the Dow?

The stock market continued its fantastic run in April finishing up 8.6% with the Dow industrials & Russell 3000 reaching all-time highs. Consider that it took seven years to move the 1,000 points from Dow 11,000 to 12,000. By comparison, the index required just over six months to run the next 1,000 points from Dow 12,000 to 13,000.

Turning bearish during this prolonged rally may sound foolish, but the market appears oblivious to the bevy of economic woes. Remember Warren Buffet’s mantra: “be fearful when others are greedy and to be greedy only when others are fearful.”

Just take a look at this week’s economic data:

  • Housing starts at 7-year low
  • Existing home sales largest one-month drop in 18 years
  • GDP growth slowest in 4 years
  • US Dollar at all-time low versus the Euro
  • Consumer spending weakest in 6 months
  • Consumer sentiment fallen 3 straight months to 9-month low
We haven’t experienced this much blind optimism since President Bush hung the “Mission Accomplished” banner on the USS Abraham Lincoln 4 years ago. Indices have continued to reach new highs on solid 1st quarter earnings & expectations of a Fed rate cut. But the lack of catalysts in May should hurt the markets while investors take profits.

Evidence is starting to show that Smart Money is beginning to watch from the sidelines. “Sell in May and go away'' is a well-known Wall Street strategy as the month historically struggles. Inflationary pressures & $4 gasoline may keep the streak alive.

Call me crazy, but I entered a large position in the ProShares UltraShort Dow30 ETF (DXD). It is essentially the double inverse of the Dow Index. In other words if the DOW falls 5%, the ETF gains 10%. You can see how risky this position is! I also purchased oil futures (USO) last month with the expectation of a return to $70. And increased my holdings in First Trust’s 9% Yield ETF (FHI).

I still hold roughly half of my portfolio in equities, but all of them are from the cheaper Nasdaq. While the S&P, Russell & DOW all are at or near all-time highs, the Nasdaq still remains 50% off its 2000 highs. So if this rally continues, I should stay even.


At 7:09 AM, Anonymous Anonymous said...

Ballsy, although if you're going to short one of the indices... the DJIA would be the one imo

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