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Time To Get Short

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I’m finally convinced that this mini-bull bounce is nearing its end.

Every major index is nearing critical resistance, the Fed’s treasury buyback program has reached its $300B limit, commercial paper markets have deteriorated even further since late ’08 despite this rally, unemployment hasn’t shown any signs of turning the corner, the Fed is talking about raising rates, and most importantly… the lack of “panic” in equity markets and housing has convinced many members of the public and Congress that it is time to worry about the public debt instead of more stimulus. Sentiment is far too positive and I’m about as contrarian as it gets, so now is the time to move.

If the Fed and treasury buyback programs end as scheduled, then I’m simply not convinced that other entities are going to completely fill those gaps.

I’ll dedicate some time later to explain in detail why this rally is soon coming to an end, but for now I’ll be buying puts and biding my time.

My opening strategy: Find 3X long ETF’s and buy OTM LEAP puts. I’ll average down every month that the Dow and S&P stay above current levels and roll into longer maturities if these levels are sustained through Q1 ’10.

There are some steals to be had out there in the leveraged ETF market. Just don’t go long any of these as the short-end (short position, not short ETF) always presents the most upside. If we end up going sideways from here as I expect (look at a Nikkei chart from ’92-99) then any shorts against leveraged long products should slowly gain in value. I’ll talk about some of the more attractive options in that market soon.

Tomorrow morning is going to be huge so I think I’ll take some smaller positions before the news releases and re-examine the situation after the market opens. Markets can remain irrational for a long time, especially backed by trillions of dollars, so don’t translate this as calling a top to the market. I just can’t see much upside from here unless dollar weakness is what’s driving the market.

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Written by Myron

10/14/2009 at 10:52 AM