Volatility is a sign of a top. The triple digit up and down
moves on the Dow in the last few days should make bullish investors
reconsider their view on the market. The 15-month rally has been
overdone for quite a long time now and even a small event could do
some serious damage to prices.
Investors need to realize that the stock rally has been created
on a wave of liquidity even though the mainstream media has
continually cited an improving economy and good corporate earnings
as the basis for the ongoing rise in stocks. Careful examination of
U.S. economic statistics indicates anything but an improving
economy. They instead show an economy dependent on government
spending, stimulus and easy money. As for good earnings, if you
believe them, ask yourself what earnings looked like in Q3 1929, Q3
1987 and Q1 2000. They were great, but that didn't prevent the
market from crashing shortly thereafter.
As for small problems, they have a way of getting bigger. The
oil spill in Louisiana is not just a major environmental disaster,
but could cause significant damage to the U.S. economy as well. The
entire global financial system could take a hit because of problems
with the PIIGS in Europe. The euro (
) fell to just above the 130 level this morning and that is an
important support level. We will have to see if it holds. The EU
has handled the situation ineptly from the beginning and has chosen
denial instead of action, and proven failed approaches over
innovative thinking. China, the epicenter of global growth, also
restricted bank credit yesterday for the third time this year.
There is also no question that the technical picture on the U.S.
stock market is deteriorating rapidly. However, this has happened
before during the last year and the market managed to miraculously
recover. Each time, more liquidity came to its rescue. At some
point though there is no longer enough extra liquidity to juice the
market. While the U.S. Fed has made it clear that it will be
keeping interest rates close to zero for a while longer, it is
slowly closing down special support programs created during the
Credit Crisis. The U.S. is no longer in control of the world
economy nor markets, however. Investors need to pay more attention
to what is going on in China. There is a severe risk of inflation
there and they will have to do something about it sooner or later.
This will not be a plus for world markets when it occurs.
Investors who want to short the markets can use ETFs to do so.
To short the Dow, S&P500, Nasdaq 100 and Russell 2000,
ProShares ETFs [[DOG]], [[SH]], [[PSQ]] and [[RWM]] can be used.
For aggressive investors who want to take a 200% short position,
the ETFs [[DXD]], [[SDS]], [[QID]], and [[TWM]] are the respective
choices. For super aggressive investors, Direxion offers 300% short
[[BGZ]] on the Russell 1000 and [[TZA]] on the Russell 2000.
Alternatively, shorting can be done by going long on the volatility
index VIX with ETFs [[VXX]] or [[VXZ]].
The Topography of Bear Market Valuations