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Message
They say to never time the market... but it looks like it's time to go short
Posted on 11/1/15 at 3:29 pm
Posted on 11/1/15 at 3:29 pm
It seems as though there are three main options available to the bearish investor: (A) lowering long-investment exposure to U.S. equities, (B) going full negative by speculating in SPXU (a 3x bear ETF for the S&P 500), or (C) speculating in put options.
I've been looking into the possibility of (C) lately, and it looked as though a June-2016 maturity put option for the S&P 500 at a 2,100 strike price might be the type of thing I was looking for. Admittedly, however, the reward just didn't seem to be worth the risk.
I think my best strategy might be (A) to just stay away from the market rather than try to speculate on being able to properly time any coming downturns. That being said, I'm really thinking that the S&P 500 might dip to around 1,800 or lower by next summer/fall.
Supporting points for my market thesis are the following:
#1. The Shiller CAPE is high. (It's now at 26.19; see the link to "U.S. Stock Markets 1871-Present and CAPE Ratio" in Professor Robert Shiller's Online Data.)
#2. Mean reversion of corporate profit ratios, which are also too high. (Note the big story about Jeremy Grantham's comments from November 2014.)
#3. Falling earnings projections that have already taken place have not yet led to commensurate changes in stock market valuations. (See recent S&P 500 earnings. Goldman Sachs has analysts still calling for $120 earnings in 2016.)
#4. Underlying macroeconomic fundamentals for the last six years have not been strong. (And that includes the lingering of horrible ratios for civilians not employed.)
#5. Housing is once again overpriced in the current near-ZIRP environment. (Lawrence Yun at NAR laughs in the face of the former Money Talk poster who once said that it would take another 50 years for U.S. home prices to reach their 2006 peak.)
#6. Commodities have already slumped from a global contraction, and Caterpillar's numbers are telling the same story.
#7. China's slow-motion meltdown will continue to get worse. Note also the big slump in steel demand.
#8. The widening of high-yield corporate bond spreads last summer shows corporate vulnerability.
EDIT: To add the current prices.
S&P 500 = 2,079.36 (Friday close)
SPXU = 31.19 (Friday close)
Put Options = 124.60 (ask for Jun-2016 at 2100 strike)
I've been looking into the possibility of (C) lately, and it looked as though a June-2016 maturity put option for the S&P 500 at a 2,100 strike price might be the type of thing I was looking for. Admittedly, however, the reward just didn't seem to be worth the risk.
I think my best strategy might be (A) to just stay away from the market rather than try to speculate on being able to properly time any coming downturns. That being said, I'm really thinking that the S&P 500 might dip to around 1,800 or lower by next summer/fall.
Supporting points for my market thesis are the following:
#1. The Shiller CAPE is high. (It's now at 26.19; see the link to "U.S. Stock Markets 1871-Present and CAPE Ratio" in Professor Robert Shiller's Online Data.)
#2. Mean reversion of corporate profit ratios, which are also too high. (Note the big story about Jeremy Grantham's comments from November 2014.)
#3. Falling earnings projections that have already taken place have not yet led to commensurate changes in stock market valuations. (See recent S&P 500 earnings. Goldman Sachs has analysts still calling for $120 earnings in 2016.)
#4. Underlying macroeconomic fundamentals for the last six years have not been strong. (And that includes the lingering of horrible ratios for civilians not employed.)
#5. Housing is once again overpriced in the current near-ZIRP environment. (Lawrence Yun at NAR laughs in the face of the former Money Talk poster who once said that it would take another 50 years for U.S. home prices to reach their 2006 peak.)
#6. Commodities have already slumped from a global contraction, and Caterpillar's numbers are telling the same story.
#7. China's slow-motion meltdown will continue to get worse. Note also the big slump in steel demand.
#8. The widening of high-yield corporate bond spreads last summer shows corporate vulnerability.
EDIT: To add the current prices.
S&P 500 = 2,079.36 (Friday close)
SPXU = 31.19 (Friday close)
Put Options = 124.60 (ask for Jun-2016 at 2100 strike)
This post was edited on 11/1/15 at 4:42 pm
7
Posted on 11/1/15 at 3:35 pm to Doc Fenton
You could go short the market and long dinars.
Posted on 11/1/15 at 9:46 pm to foshizzle
I sharted.
Posted on 11/2/15 at 9:34 am to Doc Fenton
I'm a serious amateur, but IMO the PPT will not allow a large correction between now and the Nov election next year.
Posted on 11/2/15 at 9:46 am to Meauxjeaux
Might want to check your history. 
The 2008 crash started on October 8, 2008. Obama was elected on November 4th, 2008.
The 2008 crash started on October 8, 2008. Obama was elected on November 4th, 2008.
Posted on 11/2/15 at 12:20 pm to Doc Fenton
I have read enough about #1, but I think I can comfortably say that there has been a fundamental shift in central banking globally that might make the CAPE a weaker argument for valuing the market.
Value Walk on CAPE
#2-8 all have me believing we are close, but not there yet on a market top. Have fun trying to guess when it happens though. It could be two more years. Market bears have been selling this story since 2013
quote:
There are plenty of other holes to poke into CAPE, but the last major component of Shiller’s ratio I want to address is interest rates. Even if you disregard my previous negative arguments against Shiller’s CAPE, should anyone be surprised that the ratio troughed in the early 1980s of 7x when long-term interest rates peaked. If I could earn 18% on a CD with little risk in 1981, not many people should be dumbfounded that demand for risky stocks was paltry. Today, the reverse environment is in place – interest rates are near record lows. It should therefore come as no surprise, that all else equal, a higher P/E (and CAPE) is deserved when interest rates are this low. Nevertheless, this discussion of P/E and CAPE rarely integrates the critical factor of interest rates.
Value Walk on CAPE
#2-8 all have me believing we are close, but not there yet on a market top. Have fun trying to guess when it happens though. It could be two more years. Market bears have been selling this story since 2013
Posted on 11/2/15 at 12:34 pm to Doc Fenton
quote:
#1. The Shiller CAPE is high. (It's now at 26.19; see the link to "U.S. Stock Markets 1871-Present and CAPE Ratio" in Professor Robert Shiller's Online Data.)
Looks to me like the Shiller CAPE was rejected at 26.99 back in February, and is back down to a healthier 26.19 now. The flash crash on August 20-24 was healthy and needed.
Definitely worth keeping an eye on though.
In any event, I look at the NASDAQ momentum indicators - the $NASI and the $NAMO on Stockcharts. Neither of those are suggesting a sell signal as of now, but we could be getting close.
$NASI chart
Posted on 11/2/15 at 1:47 pm to wutangfinancial
I completely agree with your point on the banks fundamentals and the cape argument being weak. I've been saying that for awhile now.
Posted on 11/2/15 at 5:03 pm to wutangfinancial
quote:
#2-8 all have me believing we are close, but not there yet on a market top. Have fun trying to guess when it happens though.
Yeah, I hear ya. Part of the reasoning behind creating this thread is to hear criticisms to talk me out of trying to pull the trigger with a speculative short, and the more I think about it, the more the risk-reward just isn't worth it to do anything with SPXU or put options.
This past year has shown me how difficult short-selling can be. Bill Gross called the German bund short, and then it happened just like that. And then he called the Shanghai/Shenzhen short, but he seemed to have no idea about when to pull the trigger on that.
I think shorting might be a game you only want to play once you see that the market has already started dropping fast, and most people are starting to join the chorus on having the same ideas that you have. This necessarily means that you will miss a lot of the drop from the very top, but shorting is so painful while you wait that it's okay.
It seems like the short game was set up a lot easier for the people in 2008 who could just invest in CDS and wait for defaults to occur.
Finally, to make a small note about the Shiller CAPE. I do agree that global monetary policy is a very good reason to explain the current divergence, and to think that the divergence could last for an extended period of time, but once the earnings start to drop, I'm guessing that the ZIRP-generated demand for risky stocks won't mean as much as it does right now. In other words, I tend to believe that the CAPE will revert to the mean eventually, and if it's driven by falling corporate earnings, I don't necessarily think that it will require higher interest rates to occur. But it's probably also just a matter of degree--e.g., the CAPE might drop 25% from 28 to 21, which is still well above historical norms, but will not drop to anything in single digits like we saw in the early 1980s.
Anyway, I'm happy to be on the sidelines of the equities market right now.
quote:
wutangfinancial
I remember the skit!
Posted on 11/2/15 at 5:19 pm to Doc Fenton
Time to go short is timing to an extent. Buying VIX, and maybe some other puts when they were cheaper and insuring one's portfolio makes ill timed moves that aren't well thought out unnecessary. Also, selling portions of one's gains, and moving these gains to a different, depressed asset class.
But I'm risky, and people downvote me all the time, so I'd never listen to me on stuff like this.
Having said this, Doc has some good points, I just don't agree with his action steps as I feel they are too late, and other, more effective actions should have been taken a long, long time ago. In my estimation.
There was a period of time SPX Leap puts were so cheap it was painful. Another guy on here is an options trader. I suspect he made a boatload of money. Forget his name. When the "China crisis" was going on, he got active on here. He knew his stuff.
Don't worry though, we'll get another insider created crisis to profit on soon enough.
But I'm risky, and people downvote me all the time, so I'd never listen to me on stuff like this.
Having said this, Doc has some good points, I just don't agree with his action steps as I feel they are too late, and other, more effective actions should have been taken a long, long time ago. In my estimation.
There was a period of time SPX Leap puts were so cheap it was painful. Another guy on here is an options trader. I suspect he made a boatload of money. Forget his name. When the "China crisis" was going on, he got active on here. He knew his stuff.
Don't worry though, we'll get another insider created crisis to profit on soon enough.
This post was edited on 11/2/15 at 5:24 pm
Posted on 11/2/15 at 5:33 pm to Iowa Golfer
Thanks, IG. These are exactly the kinds of posts I need to see.
Well, true... but that's all water under the bridge. It's interesting that you bring up the China thing, because I was having some pretty detailed discussions about this during the summer with a few people while it was happening, even though I didn't do anything about it. I still follow AFTY (an ETF for the FTSE/Xinhua China A50 Index) and YANG, but the main action seems long gone on that.
I was hoping that good action steps might still exist for once a correction begins to occur, but I agree that for a person mainly interested in protecting a portfolio, earlier steps would work more effectively.
quote:
other, more effective actions should have been taken a long, long time ago
Well, true... but that's all water under the bridge. It's interesting that you bring up the China thing, because I was having some pretty detailed discussions about this during the summer with a few people while it was happening, even though I didn't do anything about it. I still follow AFTY (an ETF for the FTSE/Xinhua China A50 Index) and YANG, but the main action seems long gone on that.
I was hoping that good action steps might still exist for once a correction begins to occur, but I agree that for a person mainly interested in protecting a portfolio, earlier steps would work more effectively.
Posted on 11/2/15 at 6:35 pm to Doc Fenton
I guess it depends on what you're trying to accomplish. If you want to make a trade, or bet, there are literally hundreds out there to meet your anticipated time line.
If you want to hedge, insure, or something along the lines of the more conservative things I do, it's pretty difficult without knowing what your exposures are. What's in your portfolio? Any exposure to commodities? Precious metals? If not, you might consider slowly picking up maybe 5% of your total here. Any real estate outside of where you live? There is an eerily predictable relationship between rents and sales market values Except in certain areas one time recently. A perfect storm because of vacant speculative inventory. Then declining sales prices. And then empty inventory being converted to rent. So both rents are sales prices depressed at the same time. Another manufactured crisis, easily preventable. Where some of us, myself in South Florida, used this to our advantage. Are you currency harvesting? You can do this inside an ETF that pays a dividend. At some point I would think this would be compelling. Why wouldn't someone take about 1-3% of their holdings, ideally selling some gains on a long term equity, potentially an overpriced asset class as you elude to, and start to look for an entry point on some riskier bonds? Take some gains and find a way to go longer than long natural gas and oil. Because although I can't predict the when, I can most certainly predict the if.
To boil it down, I insure a certain percentage of my portfolio with VIX calls. I have already sold portions of my equities at gains, and rebalanced in asset classes currently depressed. With lots of people on here laughing at me for this. Because gold doesn't pay a dividend, and just sits there, you only make money if you sell it higher than you bought it for. Unlike BRK.A, which does pay a dividend, and you make money outside of selling it at a gain. Wait? That's not right now is it? One asset class arguably too high, and another approaching a level eventually where it will be too low. I certainly think JP Morgan Chase agrees as they are taking possession, and have been in the low priced environment.
Anyway, I typed this quickly, but there are some moves out there, and I would maintain they are moves to allow one with truth to state they have a truly balanced portfolio. Now some advisors would scoff, but balanced to me means balanced, and real estate, commodities and precious metals have their place, as do bonds and some other not very sexy investment. And I would think some of these really have a place if one thinks equities are over valued. Or even if one takes an honest look, like I did, and see he is up almost 200% in equities in the last several years. maybe it's time to sell some, not all, but some of these, and take some cash and put it elsewhere. If you're not up an aggregate of 200% since the recovery, I can't help ya. Continue to do what you do I guess.
If you want to hedge, insure, or something along the lines of the more conservative things I do, it's pretty difficult without knowing what your exposures are. What's in your portfolio? Any exposure to commodities? Precious metals? If not, you might consider slowly picking up maybe 5% of your total here. Any real estate outside of where you live? There is an eerily predictable relationship between rents and sales market values Except in certain areas one time recently. A perfect storm because of vacant speculative inventory. Then declining sales prices. And then empty inventory being converted to rent. So both rents are sales prices depressed at the same time. Another manufactured crisis, easily preventable. Where some of us, myself in South Florida, used this to our advantage. Are you currency harvesting? You can do this inside an ETF that pays a dividend. At some point I would think this would be compelling. Why wouldn't someone take about 1-3% of their holdings, ideally selling some gains on a long term equity, potentially an overpriced asset class as you elude to, and start to look for an entry point on some riskier bonds? Take some gains and find a way to go longer than long natural gas and oil. Because although I can't predict the when, I can most certainly predict the if.
To boil it down, I insure a certain percentage of my portfolio with VIX calls. I have already sold portions of my equities at gains, and rebalanced in asset classes currently depressed. With lots of people on here laughing at me for this. Because gold doesn't pay a dividend, and just sits there, you only make money if you sell it higher than you bought it for. Unlike BRK.A, which does pay a dividend, and you make money outside of selling it at a gain. Wait? That's not right now is it? One asset class arguably too high, and another approaching a level eventually where it will be too low. I certainly think JP Morgan Chase agrees as they are taking possession, and have been in the low priced environment.
Anyway, I typed this quickly, but there are some moves out there, and I would maintain they are moves to allow one with truth to state they have a truly balanced portfolio. Now some advisors would scoff, but balanced to me means balanced, and real estate, commodities and precious metals have their place, as do bonds and some other not very sexy investment. And I would think some of these really have a place if one thinks equities are over valued. Or even if one takes an honest look, like I did, and see he is up almost 200% in equities in the last several years. maybe it's time to sell some, not all, but some of these, and take some cash and put it elsewhere. If you're not up an aggregate of 200% since the recovery, I can't help ya. Continue to do what you do I guess.
Posted on 11/2/15 at 6:45 pm to Iowa Golfer
Anecdotal. Three emails about initial public offerings today. Just received another as I typed the diatribe above. When the guys at lunch are talking to me about exotic trades, I'm thinking I'm just gonna keep on keeping on, and let them feel some pain. Pain, it is a very good teacher in my experience.
Posted on 11/2/15 at 7:05 pm to Iowa Golfer
quote:
If you want to make a trade, or bet, there are literally hundreds out there to meet your anticipated time line.
Yeah. I'm not really interested in comprehensive portfolio optimization strategies at this point. Without going into the details of why, I'm almost completely in cash right now and wanting to get back into the market, but reading the signs and seeing that this might not be the best time for that.
As an alternative to investing in equities or bonds, neither of which looks very attractive in the current environment, I was wondering if there could be a prudent opportunity to make a plain old directional bet on shorting the S&P 500. It would be more of a small set-aside experiment than anything, and I prefer to be a more passive long-term investor who uses leveraged equities or deep-in-the-money call options in the future; but for right now, I thought this might be a good learning opportunity for getting experience in the practical elements of executing an actual short bet.
Posted on 11/2/15 at 7:29 pm to Doc Fenton
The problem is how to short it. You'd almost need to sell a contract with no margin, and be able to wait. And the further out you go, the more expensive it is for obvious reasons.
There's no easy way to do this while keeping it conservative for a long term horizon that I know of. It's my dilemma with oil and natural gas currently. So I just patch a series of things together, mostly to meet my risk tolerance. And unwillingness to watch the various trades 24/7. Literally 24/7. There are guys right now sitting at a desk trading American listed stocks. And they'll be there overnight.
I guess there are ways to short a short instrument and wait. One guy on here says the cost to carry is too large, but I disagree with that having done exactly this. You'd need to short a long, or short a long levered instrument, and to borrow this kind of thing, you'd need IB, or an more sophisticated trading platform.
There's no easy way to do this while keeping it conservative for a long term horizon that I know of. It's my dilemma with oil and natural gas currently. So I just patch a series of things together, mostly to meet my risk tolerance. And unwillingness to watch the various trades 24/7. Literally 24/7. There are guys right now sitting at a desk trading American listed stocks. And they'll be there overnight.
I guess there are ways to short a short instrument and wait. One guy on here says the cost to carry is too large, but I disagree with that having done exactly this. You'd need to short a long, or short a long levered instrument, and to borrow this kind of thing, you'd need IB, or an more sophisticated trading platform.
Posted on 11/2/15 at 7:39 pm to Iowa Golfer
Here's the cheapest way to do your experiment (I think) without really checking long calls and their current pricing.
LINK
LINK
Posted on 11/2/15 at 7:58 pm to Iowa Golfer
So it seems to me that in order of increasing riskiness, we have: VIX (~80% short); SPXU (300% short); VIX call options; SPXU put options.
And you seem to be saying that, for me, using VIX call options would tend to be a more effective strategy than using SPXU put options, given the fact that I am not really interesting in trying to hedge other long equity positions as part of a larger portfolio.
I probably won't do anything for at least the next couple of weeks, but I'll definitely think it over as a possible option after that.
I appreciate your time and input on this. Thanks.
And you seem to be saying that, for me, using VIX call options would tend to be a more effective strategy than using SPXU put options, given the fact that I am not really interesting in trying to hedge other long equity positions as part of a larger portfolio.
I probably won't do anything for at least the next couple of weeks, but I'll definitely think it over as a possible option after that.
I appreciate your time and input on this. Thanks.
Posted on 11/2/15 at 8:29 pm to I Love Bama
quote:
Might want to check your history.
Might wanna check the party.
Posted on 11/2/15 at 9:03 pm to Meauxjeaux
quote:
So it seems to me that in order of increasing riskiness, we have: VIX (~80% short); SPXU (300% short); VIX call options; SPXU put options.
And you seem to be saying that, for me, using VIX call options would tend to be a more effective strategy than using SPXU put options, given the fact that I am not really interesting in trying to hedge other long equity positions as part of a larger portfolio.
I probably won't do anything for at least the next couple of weeks, but I'll definitely think it over as a possible option after that.
I appreciate your time and input on this. Thanks.
I wouldn't use anything other than SPX puts for the closest tracking to SPX.
You seem inclined to purchase in the money puts. At least that's what I think I'm reading. Why not use lower strike prices. The options will still increase and decrease in value this far out whether the index, in the case of SPX, or the VIX futures contract settlement ever reach strike price. And your fundamental analysis is telling you a lower S&P, so bet lower.
On both of these, do some studying, and learn exactly what both VIX and SPX are. You need to know what exactly you're buying. Most people who say buy the S&P have no idea what they mean. You really can't buy it. You can sort of buy the VIX, but not really. Clear as mud right? Because if you do, I think the first paragraph you typed above, you'll have second thoughts about. The VIX, what it actually is, is neither short nor long, although some will try to argue it is one or the other.
You had better check the settlement of both of these puts. VIX is cash settlement, and has a separate symbol for settlement, not always the futures price. I believe SPX is going to be similar, and has both AM and PM settlements. And IIRC, they are both European style options.
There will be a disclosure for both on your trading platform that you should read carefully, and also check the CBOE's web-site.
To your point above, yes the VIX calls would be clearly less expensive than SPX puts, although both would have a loss certain, but on cash settlements, think hard about closing the position if you're close to the money. Market makers can arbitrage this, and they do. Don't let them do this to you. Would a SPX put track the SPX better than a VIX call? I think near term, but given what VIX is comprised of, I see it as a more steady long term tracking device. Although longer term VIX calls have insurance premium priced in, becuase portfolio manager buy these for insurance /risk management purposes. The big one do single stock futures and have all sorts of trades that the average person can't feasibly make.
If you buy puts, you have a guaranteed maximum loss. But how and when are as much art as they are fundamental. You can be right, and be right 1 hour too late. Buying VIX for insurance is also a guessing game. I collected about two years worth of premium, and more when the China thing took off. At first blush, I had too much protection. But I buy protection for an aggregate decrease of my gains, and about an additional 20% decline in the overall market. So was it enough? too much? Who knows? But how much VIX for how many dollars in your portfolio? Try to Google that and see if you can find consensus. There is a general rule for every $10K, and for your purposes here, there are charts about VIX tracking SPX, and also some pretty in depth articles about whether one should but SPX puts, or VIX calls.
This post was edited on 11/2/15 at 9:10 pm
Posted on 11/2/15 at 9:42 pm to Iowa Golfer
quote:
You seem inclined to purchase in the money puts. At least that's what I think I'm reading. Why not use lower strike prices. The options will still increase and decrease in value this far out
I was doing some sensitivity analysis type stuff on spreadsheets based on what my returns would be for different maturity dates, strike prices, and prices for SPX on the maturity date. I think I got freaked out by how low the index would have to drop before I hit the break-even point. I might hypothesize that the index would drop below 1,800, but I don't want to lose money if it only drops to 1,950. That was behind my thought process for thinking a 2,100 strike price might suit me best, although now I'm wondering if perhaps I should look a little bit more at puts that are more out-of-the-money.
I don't know. You're definitely giving me some more things to think about though.
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