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Settling Into the Bear Camp

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Hoofy's fate has not yet been sealed, but Boo's odds are looking better and better by the day...

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With every tick lower in the major indices, the message of the charts is growing louder and clearer: If we are not yet in a primary bear market, the probabilities that one is developing are as high as they have been since the 2002 bottom. Taking it a step further, though it may not matter for the here and now, we must also consider that if we have a bear market in the offing, the possibility (rather than probability) that the S&P 500 (SPX) has put in a massive double top must be respected.

I raise these big picture items because for months now I have traded the volatility of the markets, as in "implied volatilities" rather than the more mundane meaning of "up and down" markets, rather than making an up/down directional call. Call it being conservative, chicken or whatever, that's where I saw the better risk/reward. Now that's changing, and I am somewhat more inclined to take a bearish directional bias, while respecting that the sharpest rallies occur in bear markets.

So here are some examples of how I am positioning myself:
  • On the short side I am pressing broad and narrow index shorts, focusing in the Russell 2000 Index (IWM) and the iShares DJ Real Estate (IYR). On the latter, which addresses commercial real estate (CRE), I must confess that I am turning far more bearish than I was just recently. Previously I thought that CRE would experience ugly returns for the next few years, maybe even losses, but I did not think that we would see anything remotely close to what we are witnessing in the residential space. Over the last couple of weeks we were in the market for a very sizeable transaction and what transpired has been extremely worrisome. While I still don't want to embrace the apocalyptic scenario of Prof. Shedlock, I am getting pulled toward his camp.

  • I am also leaning toward larger long term short exposure to India, via the India Fund (IFN). The combination of dangerously rising consumer inflation, a slow down in the United States, its current protectionist tendencies, and a very high level of dissatisfaction with outsourced services (noticed how companies are starting to advertise that their service call centers are not in India?) are creating a very dangerous brew for a market up almost 500% in 6 years.

  • On the long side, a bunch of stocks are currently tempting me: water play Layne Christensen (LAYN) has pulled back very hard.

  • Riverbed Tech. (RVBD) is back to more reasonable levels, though it's still mighty expensive, has exposure to enterprise spending, and the chart is at a make or (really) break level. The appeal of course is that they are the top-dog in enterprise app acceleration.

  • Ceragon Networks (CRNT) chart has already broken, but if the build-out of backhaul transfer infrastructure takes off, these guys are in a good place. The high 'teens multiple is also comforting.

  • Given the triple digit volatilities in the options and the sharp pullback it has had, there are plenty of trading possibilities on the long side of Dryships Inc. (DRYS).

  • Defense contractor SAIC Inc. (SAI) so far has been completely oblivious to the markets and credit problems and its revenue and EPS numbers continue to head in the right direction.

  • Valuation has kept me away from GPS play Trimble Navigation (TRMB) for many many moons, but it's beginning to get in range.

  • And just to beat the proverbial dead horse, Akamai Tech. (AKAM), and the Cypress (CY) long / "SunPower calls" (SPWR) short remain my favorites and among my largest longs.

  • Note also that for virtually all long positions that grow to a meaningful size, I am carrying long-dated, out of the money puts, to both ensure against a generalized meltdown, and use as backstop to increase long exposure if I need to. These "puts" positions are defensive in nature and in addition to the speculative puts / shorts I mentioned above.

One last general comment: In the past when the equity markets got agitated I have tended to gravitate toward familiar names and pass on new positions. The reason why I am now broadening my interests is because of my larger, broad short positions. I have no illusion that if the markets continue to tank my longs won't get hurt, but when they rally – and rally they will – I want spread the odds that my longs will participate.

GET THESE INSIGHTS AND MORE IN REAL-TIME. CALL 212-991-9357 FOR A 14-DAY FREE TRIAL TO THE BUZZ & BANTER OR CLICK BELOW.

Positions in IWM SPX IYR IFN CRNT DRYS SAI AKAM CY SPWR
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