Sunday, December 14, 2008

Too much optimism about stock prices

It's Grizzly Time.

In the last couple of weeks, short-term optimism about stock prices has become almost as great as it was back in May, when the S&P 500 briefly topped 1400 before swooning to new lows. In addition, the short interest ratio, which quantifies the fraction of investors who have made longer-term bear market bets, is at a multi-year low. When these factors are coupled with an S&P 500 forward P/E ratio of 21 for the 4th quarter of 2009, it just doesn't make sense to stay in cash any longer.

The positive money flow and breadth that I mentioned last week are still in play, but in my book sentiment trumps other factors in a tie. Besides, stock prices have been strangely flat despite the bullish internals.

On Monday I will direct 50% of my Roth IRA savings to the Leuthold Grizzly Short Fund (GRZZX), which means the purchase probably won't happen until Tuesday. In my taxable margin account, I will sell short the leveraged 2x bull fund SSO, instead of buying the 2x bear fund SDS. This way I will actually get a boost in my returns if the derivatives market implodes.

There's a good chance that world events will sabotage my timing, either by crashing the market on Monday before my purchase is made, or by an auto-bailout-Wednesday that rallies the market right after I've taken a bearish stance. These things happen - especially in a market as volatile as this one.

December 15 update: It's just occurred to me that I may need the cash from my taxable account in the next few months - both to fund my Roth IRA for 2009 and for other things - so I'm not going to short SSO this time around.

December 16 update: My opening position in GRZZX was priced at $9.23 per share.


Tim said...

Jody Short interest may be down in the indexes but it is higher in such key stocks as Google, Apple. Microsoft, Bank of America, JP Morgan and many others than it has over the past 4 months.
I think that you have to also look at the breadth of the decline, up to 50% and consider it happened in less than 13 mos.
All these things in my opinion would not warrant a opening new bearish positions. That said, I wish you the best of luck.

adventurerneil said...


Alright! Nice to see you finally make a call on here, with a pledge to put money where your mouth is.

I'm a big fan of small stakes in this market. In addition to your blog, I regularly read, who advocates strict position sizing rules to minimize portfolio risk.

He states that for portfolios of ~20k-100k, you should never risk more than 1% of your total assets on a trade. If you followed this rule, you would buy 10% GRZZX, and set a 10% stop-loss (10% of 10% is 1% of your total portfolio). Or, if you wanted to allow for more volatility, you could do 5% total, with a 20% stop-loss.

Anyhow, I'm currently shorting real estate with a tiny stake in SRS. It's currently down 30%, but I am confident enough in the continued real estate crash that I'll stick it out.

If I were to enter into another short position soon, I might wait until S&P 950, which is very possible with the santa rally.

Best of luck and prudence.


Anonymous said...

Seems like an Auto bailout is mostly priced in already. Remember how the market actually went down after the bank bailout passed? I wouldn't be surprised if we see the same thing again this week.