The Contrary Investing Report
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Update on our Short S&P 500 Position

by Brett on May 21, 2010

So far so good on that short S&P 500 position we initiated Wednesday afternoon via the futures market.  We had a beautiful nosedive in equities yesterday – it was truly breathtaking, really – followed up by a somewhat muted rally that didn’t get going until late in today’s trading day.

Shorting the S&P 500 Position

Heading into Thursday’s trading, the stock market was oversold – and it got pummeled anyway.  That’s what happens in bear markets – some of the real carnage happens when markets are already severely oversold.

So it’s important to not get too cute, and trade with the major trend, not against it.  The mega-trend we’re playing is that we are still within the context of a larger bear market – one that began in 1999.

Personally I believe this leg down will take out the March 2009 lows before it’s all said and done – perhaps decisively.  I’m using the Great Depression’s stock market performance as the model here – because I believe this is another depression, and NOT your run of the mill post-WWII recession.

Note that if you disagree with my base assumption here, you’re naturally going to disagree with my trading strategy as well – or at least you should!

Stock-Market-Price-Chart-May-17-2010

Source: Yahoo Finance

Despite today’s late rally, the market was DOWN – big – for the week.

I was tempted to cover the short position this morning and book the profits – but decided against it.  That would have violated the tried and true trading maxim of letting your winners run.

The correct strategy is to figure out appropriate times to add to these winning positions.  So we will watch the market for shorter term tops that can be further shorted.

The market could retrace higher from here, so tread carefully when initiating new positions.  It could be slightly early, but then again, it’s tough to tell when these bear markets pick up a head of steam.  It’s usually wise just to get short early and often, and stay out of the way!

Or when in doubt, stay in cash, and follow our deflation investing strategy.


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Read more on S&P 500 (SPX) at Wikinvest

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