Why I Just Shorted the S&P 500

Why I Just Shorted the S&P 500

Regular readers know that I’ve been anxious – TOO anxious – to short the S&P 500.  The reflation rally was determined to “end when it ends” – and not a moment sooner.

Although we are still trading above the magical 200-day moving average, I have to believe that the odds are that the current trend is now DOWN.  Why?

  1. There is more conviction on declines than rallies (see volume below)
  2. The market failed to rally to new highs after the sharp decline of a couple weeks back
  3. Our favorite leading indicators – China, oil, etc – have all turned south – WAY south

S&P Price Volume Chart
Source: StockCharts.com

It’s been much higher volume on the drops than the rallies – which usually means the sellers are acting with more conviction than the buyers.

Summing it up: No trade is ever a sure thing.  But at this juncture, I believe the odds of us heading to the downside – and more importantly, the potential magnitude of a decline – far outweigh upside odds and potential.

In geeky mathematical terms:

(Odds of decline) x (Size of decline) > (Odds of rally) x (Size of rally)

Which means…we’re going short the S&P…again…via the futures markets!

Short the S&P 500

If you are also thinking about shorting the S&P – but want to do it via the comfort of your online stock trading account (a la Scottrade) – check out SDS, the double-short inverse ETF on the S&P.

Just make sure you go LONG SDS in order to go SHORT the S&P – it’s an inverse fund that will rally (and probably rally like hell) if the S&P gets flushed down the crapper.

SDS Price ChartSDS looks poised to break out of it’s bullish “falling wedge pattern”.

Source: StockCharts.com