Market is weak; scale into shorts

The market looks weak

My Bull Index shows that the market is “weak” (reading 266/1000). Strength appears to have peaked in October 2010 and global indices have been steadily deteriorating since then.

I think it makes sense to short the market. Some of my colleagues are opening large put option positions, but I prefer slowly scaling into short positions – these are positions I hold for several quarters and usually more than a year.

Don't rush into positions

If you look back at the 2007-2009 bear, there were plenty of opportunities to get in short. There is hardly ever a hurry to get in immediately. If you hold long-term positions like I do, then I encourage you to:

What happens next?

The market is weak, but it will probably rally hard at some point. The question is: how high does it get, and does it look like the bull resumes? In the S&P 500 rally of September 2007 (a year before the crash), the index only rallied above the 200 day moving average for about a month before falling below... and once it fell below, it stayed below until June 2009.

Useful trend lines to watch are the 100 and 200 day simple moving averages. When the market bottomed in 2009, the index went from staying below the 100 and 200 dma averages to staying above them.

If the S&P 500 were to bounce here and then stay above its 200 dma for months, a bear like me would be on the wrong side of the market. It's much too early to tell now.

T-bill yields

US t-bills have incredibly low yields now. The 3-month is currently 0.01% and 6-month is 0.07%. This concerns me as it indicates a strong global demand for cash and ultimate liquidity. This was first visible back in April as shown below:

T-bills vs S&P 500


I am short the TSX, NASDAQ, and US financials.

- Perpetual Bull,