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With Stock Markets Peaking, It’s An Opportune Time To Short Sell Via Inverse Spreads - Prospering Bear News Blog [entries|archive|friends|userinfo]
Jan Allen

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With Stock Markets Peaking, It’s An Opportune Time To Short Sell Via Inverse Spreads [Oct. 19th, 2006|02:40 pm]
Jan Allen

I.  Summary:
Evidence exists that the stock markets are peaking or have peaked today, Thursday October 19, 2006 and that this presents the opportune time for short selling.

 
II.  The Chart of the ETF IWM, which is an investment that seeks investment results of the Russell 2000 index suggests that the Russell 2000, like all of the stock market has peaked and that this represents an opportune time to sell stocks short
Chart of the ETF IWM

III.  Short selling can be done via inverse spreads -- by being long one investment and short another:
A-1.  General financial market inverse spreads

EditDisplayCall Option SpreadLong SDS and Short KSECXbc?t=3m&s=SDS&l=off&z=m&q=l&c=ksecxFinancial
EditDisplayDow Jones Industrial Average SpreadLong UWPIX and Short UDPIXbc?t=1y&s=UWPIX&l=on&z=m&q=l&c=udpixFinancial
EditDisplayNasdaq 100 SpreadLong USPIX and Short UOPIXbc?s=USPIX&t=1y&l=off&z=m&q=l&c=uopixFinancial
EditDisplayNikkei 225 Stock Spread
Long UKPIX and short UJPIX bc?t=6m&s=UKPIX&l=off&z=m&q=l&c=ujpixFinancial
EditDisplayRussell 2000 Spread
Long RYIRX and short UAPIXbc?t=6m&s=RYIRX&l=off&z=m&q=l&c=uapixFinancial
EditDisplayS&P 500 Index Spread

Long SDS and short ULPIXbc?t=6m&s=SDS&l=off&z=m&q=l&c=ulpixFinancial
EditDisplayS&P MidCap 400 Index SpreadLong MZZ and Short UMPIXbc?t=6m&s=MZZ&l=off&z=m&q=l&c=umpixFinancial
EditDisplayUtility stock spreadLong SDS and Short UPTSXbc?s=SDS&t=6m&l=off&z=m&q=l&c=utpsxInterest Rates
EditDisplayBanking stock spreadLong SDS and Short BKPSXbc?t=6m&s=SDS&l=off&z=m&q=l&c=bkpsxMarket Sector
EditDisplayBasic materials stock spreadLong SDS And Short BMPIXbc?s=SDS&t=3m&l=off&z=m&q=l&c=bmpixMarket Sector
EditDisplayBiotechnology stock spreadLong SDS and Short BIPSX bc?s=SDS&t=6m&l=off&z=m&q=l&c=bipsxMarket Sector
EditDisplayConsumer goods stock spreadLong SDA and Short CNPSXbc?t=6m&s=SDS&l=off&z=m&q=l&c=cnpsxMarket Sector
EditDisplayEmerging market debt spread 

Long SDS and short PREMXbc?t=3m&s=SDS&l=off&z=m&q=l&c=premxMarket Sector
EditDisplayFinancial stock spreadLong SDS and Short FNPSXbc?t=6m&s=SDS&l=off&z=m&q=l&c=fnpsxMarket Sector
EditDisplayHealth care stock spreadLong SDS And Short HCPIXbc?t=6m&s=SDS&l=off&z=m&q=l&c=hcpixMarket Sector
EditDisplayInternet stock spread
Long USPIX and Short INPIXbc?t=1y&s=USPIX&l=off&z=m&q=l&c=inpixMarket Sector
EditDisplayPharmaceutical stock spreadLong SDS And Short PHPSXbc?t=6m&s=SDS&l=off&z=m&q=l&c=phpsxMarket Sector
EditDisplayReal estate stock spreadLong SRPIX and Short REPSXbc?t=1y&s=SRPIX&l=off&z=m&q=l&c=repsxMarket Sector
EditDisplaySemiconductor stock spreadLong SDS And Short SMPSXbc?s=SDS&t=6m&l=off&z=m&q=l&c=smpsxMarket Sector
EditDisplayTechnology stock spreadLong SDS And Short TEPIXbc?t=6m&s=SDS&l=off&z=m&q=l&c=tepixMarket Sector
EditDisplayTelecommunications stock spreadLong SDS and Short TCPSXbc?t=6m&s=SDS&l=off&z=m&q=l&c=tcpsxMarket Sector
EditDisplayU.S. Mobile Telecom Index SpreadLong SDS and Short WCPIXbc?t=3m&s=SDS&l=off&z=m&q=l&c=WCPIXMarket Sector

A-2.  The wisdom of inverse spreads is seen in the case of the semiconductor stock spread long SDS and short SMPSX.
SMPSX is an investment that seeks daily investment results that correspond to 150% of the daily performance of the Dow Jones U.S. Semiconductor index. The 5 day trading report from Barchart.com shows a loss of 7.18%.  SDS is an investment that seeks 200%  the inverse (opposite) of the daily performance of the S&P 500 Index.  The 5 day trading report from Barchart shows a gain of 0.30%. The net loss of the two investments is 6.78%; but because this is an inverse spread the 'loss' becomes a 'gain' of 6.78%

SMPSX - SEMICONDUCTOR ULTRASECTOR PROFU (FUND)

DateOpenHighLowLastChange% Change
10/20/0616.8016.8016.8016.80-0.23-1.35 %
10/19/0617.0317.0317.0317.03-0.11-0.64 %
10/18/0617.1417.1417.1417.14-0.44-2.50 %
10/17/0617.5817.5817.5817.58-0.70-3.83 %
10/16/0618.2818.2818.2818.28+0.18+0.99 %

SDS - PT ULTRSHRT SP500 PS (AMEX)

DateOpenHighLowLastChangeVolume% Change
10/20/0662.1762.9862.1362.18+0.07306000+0.11 %
10/19/0662.5162.6562.0362.11-0.19192900-0.30 %
10/18/0661.7162.9061.5262.30+0.01423800+0.02 %
10/17/0662.3462.9862.1062.29+0.41305600+0.66 %
10/16/0662.1562.2361.7561.88-0.12191400-0.19 %



  
B. Weakening country market inverse spreads
EditDisplayWeakening MSCI EAFE IndexLong DXESX and Short DXDLXbc?t=3m&s=DXESX&l=off&z=m&q=l&c=dxdlxWeakening country
EditDisplayWeakening MSCI Emerging Markets Index Long DXESX and Short DXELXbc?t=3m&s=DXESX&l=off&z=m&q=l&c=dxelxWeakening country
EditDisplayWeakening S&P Latin America 40 Index Long DXESX and short DXZLXbc?s=DXESX&t=3m&l=off&z=m&q=l&c=dxzlxWeakening country
EditDisplayWeakening country spread: SpainLong UVPSX and short EWPbc?t=6m&s=UVPSX&l=off&z=m&q=l&c=ewpWeakening country
EditDisplayWeakening country spread: TaiwanLong UVPSX and short EWTbc?t=6m&s=UVPSX&l=off&z=m&q=l&c=ewtWeakening country
EditDisplayWeakening country spread: MexicoLong UVPSX and short EWWbc?t=6m&s=UVPSX&l=off&z=m&q=l&c=ewwWeakening country
EditDisplayWeakening country spread: BrazilLong UVPSX and short EWZbc?t=6m&s=UVPSX&l=off&z=m&q=l&c=ewzWeakening country
EditDisplayWeakening country spread: IndonesiaLong UVPSX and Short IFbc?t=3m&s=UVPSX&l=off&z=m&q=l&c=ifWeakening country
EditDisplayWeakening country spread: IndiaLong UVPSX and short MINDXbc?t=6m&s=UVPSX&l=off&z=m&q=l&c=mindxWeakening country
EditDisplayWeakening country spread: ChinaLong UVPSX and Short OBCHXbc?t=6m&s=UVPSX&l=off&z=m&q=l&c=obchxWeakening country
EditDisplayEmerging Markets Telecommunications SpreadLong UVPSX and short XETFXbc?s=UVPSX&t=6m&l=off&z=m&q=l&c=xetfxWeakening country



IV.  The following analysis and chart from stocktiming.com email advisory of 9-19-2006 suggests the S&P 500
can continue to rise only if Volatility remains subdued; this report is very favorable to short selling and suggests the timeliness of taking action.

The VIX (Volatility Index) goes up, and the market goes down.
The VIX goes down, and the market goes up ... that's basically how the VIX works.

Below is an hourly VIX (Volatility Index) chart of what has happened since September relative to the S&P 500.

Note the slope of the S&P's support line and the slope of the VIX's resistance level.  This is exactly how they should be behaving with each other.

Note how perfectly the resistance levels have been hit on the VIX.  There were 4 exact hits on the resistance line.  Each time the VIX hit its resistance, it immediately retreated.

But now, the VIX's resistance line will soon squeeze all the way down to its support line.  As long as the VIX does not break out above the resistance line, it means that its rises will be lower tops than the previous rise. 

And, that means, that as long as the VIX stays within this triangle pattern, that the S&P can continue to rise. 

If the VIX rises above the resistance line, AND the S&P 500 breaks below its support line at the same time, then the market will pull back. 

 





V. ProFunds Ultra Dow 30 Inv (UDPIX) manifested a P&F ascending triple top alert today; this is an investment that seeks twice the performance of the DJIA.

A
. The chart of UDPIX showed a P&F ascending triptle top alert today
B.  Here is the one year chart of UDPIX from Yahoo Finance
Chart

VI.  Finally, the reports from the following analysts suggest that the stock market is topping out and that this is the opportune time for short selling. 

A.  Richard T. Williams, CFA, CMT in A Chill in the Air writes: "We think the SPX is about to move in concert with oil and rates but in the opposite direction. Since the market has put up such a strong rally for the last couple of months a corrective pullback would be likely in any event so the real test will be the character of the downside. Bulls have run the table for so long that they will complacently give back some ground without a fight, until they realized that something else is happening, 
perhaps 5-10% down from the highs. Only then will they become worried and then fearful, the necessary ingredients for a bottom in stocks. It is for these reasons  that we expect a deep decline in stock prices rather than a shallow corrective pause before a run to new highs."

The ICAP Research 5-year Volume-adjusted Price Chart for S&P500 shows that for a new high on VAP, the momentum is strikingly weak suggesting a failure in the market soon.

(His earlier report concluded: Momentum is so far below VAP compared to prior rallies, that a return to the LT sell signal is likely soon)

B. Dominick writing on 10-15-2006 in Target Reached  relates: I still think that we’re late in the game and I have much more concern for a reversal, rather than worrying about missing the rest of the move, if there is any left. The trend is still up, which might not be the case on Monday 10-16-2006 or Tuesday 10-17-2006, but there is no confirmation of a turn at the moment. 

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