Why I’ve just shorted the market

October can be a bit of wrench to get through. It’s not just the autumnal feel, it’s also a tricky time for markets. And this year I’ve certainly got the jitters.

So to make myself feel a little bit better, I’ve just put a small short on the market.

It’s not something I do lightly, and I expect to be out of it by the end of the month. But I thought I’d write to you today to tell you about it. Maybe it’ll keep us both in good spirits.

Spain wants to play chicken

In a world full of ticking financial time bombs, it’s Europe that really has me worrying.

This morning, sees the launch of Europe’s new European stability mechanism (ESM) – effectively a new bail-out fund. Everyone in Europe wants Spain to rock up and take a bail-out. But Spain doesn’t want to get involved…

Spain’s politicians and its people see what’s happening in Greece. They see that accepting a bail-out is tantamount to giving up sovereignty. The so-called Troika of ECB, European Commission and IMF act like the receivers in the case of a failing business. You take a loan. They tell you where they want cut-backs (austerity) and how they want to increase revenues (taxes). Then the public go bananas, the economy goes down the drain and the Troika increases the dose.

So Spain doesn’t want to invite the witch doctor into its home. And European officials are spitting feathers. They thought they had this one in the bag. I mean, the only reason Spain has been given a little breathing space is because Mario Draghi (head of the ECB) promised to buy Spanish bonds in the market. Yields on Spanish debt have fallen out of the danger zone on the mere mention of help from Doctor Draghi. But yields are creeping up again. And that makes this situation dangerous.

You see, Draghi will only help if Spain first goes cap in hand to the Troika. He wants the Spanish to take their medicine. He wants them to invite in the IMF to police Spain’s finances and make sure these bonds are repaid…

Get ready for some October nasties

I think it’s a matter of time before Spain caves in.

Last week, I said that the banking industry has the most powerful political lobby in the world. And that takes the form of the central banks. Draghi is head of Europe’s central bank. Ultimately his aim is to keep the banks in good shape, or at the very least solvent. And seeing as the banks are full of souring European sovereign debt, he has to find a way of keeping this paper from heading down the tubes. The way to do that it seems, is to foist more debt on the peripheries (so they can make good on their bonds) and take control of the nation’s treasury.

Unfortunately for Spain’s politicians, it’s not for them to decide that they don’t need a bail-out. It’s not for the nation’s citizens either. The banks have already put in motion what’s going to happen.

I’m sure the bail-out will come. And I’m sure it won’t be long either. But I’m worried that before Spain ultimately cedes control of her destiny, we’ll have to see some market nasties. October is a good month for that.

How to spot a good trade here

Here’s why now seems as good a time as any to put on a short…

Six-month FTSE 100 chart with Bollinger bands

6-month FTSE 100 chart with Bollinger bands

Source: Digital Look

 
Regular readers will know that I always like to throw the Bollinger band overlay onto a chart. It’s the shaded blue area – it’s a simple technical tool that shows the upper and lower levels of where the stock or index should trade at any given time.

I like to buy when the blue line (the FTSE 100 in this case) is near the bottom of its band. And if I’m selling a position, I’ll tend to do so near the top of the band.

And on the rare occasion that I short something (effectively selling), it’s going to have to be near the top of the Bollinger band for me.

While the FTSE isn’t hugging the top of its band, it’s not far off.

And it is October after all.

I used a spread bet. If you plan to do the same, please bear in mind the dangers. A £1-a-point down-bet when the index is 5,850 will effectively give you £5,850 of financial exposure.

Now, though the provider may only ask for a much smaller deposit (£300 maybe), it’s easy to see that you can lose more money than you put down.

Always multiply the index value by the number of pounds per point to see exactly what you’re getting yourself into.

I’ll update you on this trade in the coming weeks. But if you are interested in learning to trade, you should also sign up to MoneyWeek Trader. It’s a completely free trading email written by John Burford – a former rocket scientist for NASA and a superb mentor for anyone new to trading.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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  • Swallowcres

    “Keep a watchful eye on the Russell 2000 this month. Caution is warranted until it closes above 868 for an entire week. And if it can’t by the end of October, I’d be prepared to sell every share you own.”
    http://admin.wyattresearch.com/article/this-chart-hints-a-crash-is-near/28636

    Stock Bear Looming?
    “The problem today is our current bull market is long in the tooth, running longer and higher than average. And the older any trend in the markets gets, the greater the odds of an impending major reversal. After a bull market, a bear is absolutely inevitable. The only question is when it will awaken from hibernation. “

    http://www.zealllc.com/2012/bearloom.htm

  • warwick F

    Is this really correct??

    “£1-a-point down-bet when the index is 5,850 will effectively give you
    £5,850 of financial exposure”

    In the context it appears “exposure” means exposure to loss rather than profit opportunity.
    Surely your exposure (to loss) is actually unlimited with a down bet?? If you place an up bet – then your exposure is then £5830 – i.e. if the market falls.
    Have I got it completely wrong?

  • jeff

    i think you are wrong, i have the FTSE going to brake 6,000

  • warwick F

    Jeff – I am seeing a reversal in mid October, how deep remains to be seen, but I cannot see how even the most irrational exuberance can push past 5950 before then, and if the recent low of 5750 is breached then a definite bear trend is looking like its imminent (or evident)
    this current uptrend from 5280 in May looks like its been stopped out way below the years high of 5950 – I wonder why you think equities will break upwrds at this late stage with the current negative outlook on most fronts?

    Kindest regards WF

  • Nellbert

    Warwick f – you’re correct. The exposure mentioned in the article is for a buy trade not a sell

  • jeff

    Warwick F. I still think we are in an up trend, i would short after 6000 is broken. only time will tell.

  • bengt

    Warwick
    You’re right. In technical terms, the market could go up forever – and a short therefore has unlimited liability.

    But I think it’s useful to consider the financial exposure as £5,850 – because if the market moves down 10%, then you profit £585

    If the market goes up 10%, then you lose £585.

    Too many people bet an arbitrary number, not really knowing how much they’re really in for.

    Hope this helps

  • spotty

    Warwick you are correct. if you buy at 5850 then you risk it going to zero. if you sell at 5850 it could double and your loss would be the same.
    Jeff im interested in your comment. braking 6000. does this mean its slowing down?

  • Red 7

    LOL spotty

    I guess Jeff wrote it in a hurry paying more attention to numbers than letters.

  • NVP

    Bollinger bands for me are probably the least effective envelope based system ….especially for trying to anticpate retraces

    experiment with keltners , kaufmanns Adaptive ma and even just add some sidewings to your normal MA……all interesting

    NVP

  • Orb

    Dear All,

    “The market can remain irrational for longer than you can remain solvent!”

    And,

    “The trend is your friend ’til the bend in the end!”

    Keep speculating the turn; the bankers and brokers are waiting to eat you alive!

  • IJ

    Well Orb. Have you looked at some of the index charts today- particularly in the US? look at the Nasdaq 100. Bit of a bend there already, my friend. Markets seem to have run out of steam, with two recent rally attempts, both on good news (this is significant), fizzling out: one immediately after QEternity announcement, the other on last week’s job data. These failures could prove telling, and when you add this technical deterioration to the worsening fundamental picture outlined by Bengt i’d say this is not a time to be aggressively long. For anyone brave enough to short, there’s a cornucopia of overpriced garbage out there.

  • Boris MacDonut

    Shorts in October ! As the long nights return I’d expect you to be wrapping up warm Bengt.

  • bengt

    Boris
    As always, you are right.

    In fact many wrongly say: “You Nordic’s, you should be used to the cold!”

    But of course, Boris has his finger on the pulse – we’re wimps…. Nordics wrap up well and make sure they’re well sorted for the big freeze.

    Nice to hear from you Boris

    Bengt

  • Orb

    IJ at 12 (and perhaps others), you’ve completely missed the (friendly warning) point I was making: there are many ‘geniuses’ out there who expect to be able to call the turn; we simply can’t.

    Personally, I prefer ‘S’ and ‘R’ levels (incl. trend lines) and candlestick patterns. Not sure about NASDAQ (I don’t follow it), but as far as the FTSE 100 and Wall Street are concerned, the trend line ‘S’ level has not yet been convincingly broken.

    Again, personally I expected ‘the turn’ to occur sooner; good thing I didn’t put money on it! Price is now back to the point of decision making: are you going to ‘call the turn’ or follow the trend?

  • IJ

    Hey Orb. Not sure i missed the point really. i’ve learned the hard way about trying to call the turn and realise i’m no genius. So now i use stop losses and wait for signs. You’re right that support levels on the Dow and FTSE aren’t yet broken. But then i looked at the Nasdaq, which shows a clear trend break. Have a look for yourself. Of course it might not mean anything. However, tech has been a leader in the bull run since the 09 bottom and may provide a clue as to where everything’s heading in the short term. I’m taking my cue from the Nasdaq and am short the Dax, the best performer this year and most vulnerable among majors to the risks Bengt mentions. It’s testing support as i write. Let’s see.

  • Orb

    So, for the FTSE100 & Wall Street, it would appear that for the time being the trend is still the friend?

    Discuss….!

  • jeff

    spotty, breaking 6000 is not slowing down it means the market is going to continue on the UP…..

  • jeff

    Red.7 I did not write in a hurry, i am a man of few words. Numbers is what it is all about,

  • Joe

    19 Jeff. The point is in your post at 3. you spelt ‘brake’ rather than ‘break’ 6000. I think Spotty was being tongue in cheek… and Red 7 was suggesting the spelling error was as a result of you writing in a hurry…

    Anyway, the jury is still out. Bengt must be a few pips in profit now if he shorted around 5840. Big move still to come… might think about some FTSE puts as a hedge. Any views on options?

  • Orb

    Bengt, Swallowcres, warwick F, IJ & Joe, hope none of you burnt up too much of your profits.

    :-)

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