Best way to short the equity market

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b0chatma
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Best way to short the equity market

Post by b0chatma » Sat Mar 03, 2018 4:26 pm

HI All,

I plan to short the equity market; however, I don't see a great investment vehicle to do this. I have a 401k, roth IRA, and a traditional cash account. So 2 of the 3 will not allow margin to short stocks. I looked at inverse ETFs such as "SH" but those are created specifically for daily trading and compound daily and don't do a great job tracking the underlying asset. I've also considered buying in the money leaps which could work as well but I'm going to pay a premium and still not get that great of tracking. I would like to hold the short for the full length of the downtrend which could easily be over a year.

Any suggestions?

Thanks

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Tycoon
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Re: Best way to short the equity market

Post by Tycoon » Sat Mar 03, 2018 5:27 pm

You'll shoot your eye out.
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Re: Best way to short the equity market

Post by abuss368 » Sat Mar 03, 2018 5:31 pm

Tycoon wrote:
Sat Mar 03, 2018 5:27 pm
You'll shoot your eye out.
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Re: Best way to short the equity market

Post by abuss368 » Sat Mar 03, 2018 5:34 pm

b0chatma wrote:
Sat Mar 03, 2018 4:26 pm
HI All,

I plan to short the equity market; however, I don't see a great investment vehicle to do this. I have a 401k, roth IRA, and a traditional cash account. So 2 of the 3 will not allow margin to short stocks. I looked at inverse ETFs such as "SH" but those are created specifically for daily trading and compound daily and don't do a great job tracking the underlying asset. I've also considered buying in the money leaps which could work as well but I'm going to pay a premium and still not get that great of tracking. I would like to hold the short for the full length of the downtrend which could easily be over a year.

Any suggestions?

Thanks
The reason for the lack of responses is your are probably on the wrong investment forum for such a question. Bogleheads generally do not try to time the market.

Many years ago during our individual stock picking days, we thought we knew more than the markets. We "invested" (or perhaps the better word is speculated) with SDS. This is an inverse ETF on steroids. It simply did not go well.

Moving our investment portfolio to a few low cost and diversified total market funds with Vanguard was simply the best financial decision we ever made.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

lws6772
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Re: Best way to short the equity market

Post by lws6772 » Sat Mar 03, 2018 5:40 pm

Tycoon wrote:
Sat Mar 03, 2018 5:27 pm
You'll shoot your eye out.
Or maybe even, "you'll short your eye out."

topos
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Re: Best way to short the equity market

Post by topos » Sat Mar 03, 2018 5:49 pm

For the sake of curiosity, I just google "how to short the s&p 500" and found plenty of information.

Investopedia gives 4 strategies:
  • Borrow the S&P 500 ETF
  • Inverse S&P 500 Mutual Funds
  • Buy Put Options on the S&P 500 ETF
  • S&P 500 Index Futures
The Put Option has a ceiling on the amount one can loose.

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Re: Best way to short the equity market

Post by radiowave » Sat Mar 03, 2018 5:55 pm

Dumb question, what does shorting the equity market mean?
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anoop
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Re: Best way to short the equity market

Post by anoop » Sat Mar 03, 2018 6:00 pm

I had to check the date just to make sure it wasn't April 1. :D

Shorting requires getting 2 things right -- you have to decide how low the market will go and in what time frame. Getting either one wrong means you lose. Many bearish funds closed shop waiting for the market to drop.

The easiest vehicles to lose your money are the inverse ETFs, e.g. SDS, DXD, etc.

If you have to ask how to short, you probably shouldn't be doing it.

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Re: Best way to short the equity market

Post by livesoft » Sat Mar 03, 2018 6:08 pm

Login to your brokerage account and submit your order:

Image

Be sure to click "Confirm", too. It is really that easy.
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Re: Best way to short the equity market

Post by Tyler Aspect » Sat Mar 03, 2018 6:21 pm

b0chatma wrote:
Sat Mar 03, 2018 4:26 pm
HI All,

I plan to short the equity market; however, I don't see a great investment vehicle to do this. I have a 401k, roth IRA, and a traditional cash account. So 2 of the 3 will not allow margin to short stocks. I looked at inverse ETFs such as "SH" but those are created specifically for daily trading and compound daily and don't do a great job tracking the underlying asset. I've also considered buying in the money leaps which could work as well but I'm going to pay a premium and still not get that great of tracking. I would like to hold the short for the full length of the downtrend which could easily be over a year.

Any suggestions?

Thanks
There is not a good and safe investment vehicle for shorting the equity market. We would all be using it if it were available. I can show you this basic performance chart on three typical asset allocation ratios.

https://www.portfoliovisualizer.com/bac ... tion3_3=60

You can see the maximum draw-down for each sample asset allocation during the last recession. Although the net asset value drop can be scary the market eventually bounces back. If you have a steady job, then you would be buying stocks at a discount during a recession; although a job loss during a recession might ruin that plan.

In my mind the best way to address the recession problem is to have a very beefy emergency cash position, say up to one year worth of expense. This is to insure against the chance of a job loss. Reserve even more cash if you are prone to panic.
Last edited by Tyler Aspect on Sat Mar 03, 2018 8:14 pm, edited 1 time in total.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

b0chatma
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Re: Best way to short the equity market

Post by b0chatma » Sat Mar 03, 2018 6:28 pm

I agree this is likely not the place for this question. This is in regards to trend following.

With the Shiller PE Ratio at +32 this market could be on a downtrend for a couple years until stocks to get back to normal PEs again. Look at any period with a with a Shiller PE ratio +25 (http://shiller.barclays.com/SM/12/en/in ... ratios.app) and then use a 7 month EMA as your short entry/exit signal. That puts you in 99' tech bubble, 2008 financial crisis and 2018 (today). 99' and 2008' both had a downtrend you could have shorted for about 2 years. I would never short the market when the Shiller PE is less than 25. I'm just trying to find the right tool to do that.

You have thousands of tools to go long but when going short everything is derivatives based and margin. So it's much more complicated. Regardless I think it's worth consideration. I don't have any interest in being in t-bills for the next two years and I'm definitely not sticking in stocks once the trend breaks to the downside. Diversification into multiple index funds won't save me from a multi-year bear market (systematic risk/market risk) it will only reduce my Unsystematic risk.

b0chatma
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Re: Best way to short the equity market

Post by b0chatma » Sat Mar 03, 2018 6:29 pm

livesoft wrote:
Sat Mar 03, 2018 6:08 pm
Login to your brokerage account and submit your order:

Image

Be sure to click "Confirm", too. It is really that easy.
Shorting can't be done in your 401k or roth IRAs since it requires margin.

livesoft
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Re: Best way to short the equity market

Post by livesoft » Sat Mar 03, 2018 6:30 pm

b0chatma wrote:
Sat Mar 03, 2018 6:29 pm
Shorting can't be done in your 401k or roth IRAs since it requires margin.
Right, but you stated that in your first post.
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Peter Foley
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Re: Best way to short the equity market

Post by Peter Foley » Sat Mar 03, 2018 6:31 pm

The only way I would consider doing this is by buying put options. I'm not recommending this, but it is a way to protect one's existing holding. Under some circumstances owners have to hold an investment and cannot sell. Buying a put offers them some downside protection.

I had thought of this a a way of protecting a Roth conversion now that one cannot recharacterize. It is not a very Bogleheadish approach to investing, but it is an alternative.

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whodidntante
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Re: Best way to short the equity market

Post by whodidntante » Sat Mar 03, 2018 6:36 pm

A few ways.

Sell an S&P 500 e-mini futures contract.
Buy puts on SPY.
Buy Cambria tail risk. http://www.etf.com/TAIL
Borrow shares of SPY and sell them.

Olemiss540
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Re: Best way to short the equity market

Post by Olemiss540 » Sat Mar 03, 2018 6:38 pm

livesoft wrote:
Sat Mar 03, 2018 6:08 pm
Login to your brokerage account and submit your order:

Image

Be sure to click "Confirm", too. It is really that easy.
Can we sticky this post? Would help for all of the market timing posts as to how to followup with one's gut feeling about the market direction.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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Re: Best way to short the equity market

Post by drk » Sat Mar 03, 2018 6:56 pm

I'd like to propose a law of contrarian investing: if you go to a Bogleheads forum for advice on how to short the market, you have no business shorting the market.

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Re: Best way to short the equity market

Post by Tyler Aspect » Sat Mar 03, 2018 6:59 pm

Olemiss540 wrote:
Sat Mar 03, 2018 6:38 pm
livesoft wrote:
Sat Mar 03, 2018 6:08 pm
Login to your brokerage account and submit your order:

Image

Be sure to click "Confirm", too. It is really that easy.
Can we sticky this post? Would help for all of the market timing posts as to how to followup with one's gut feeling about the market direction.
There is unlimited downside risk when selling uncovered short. Not recommended.
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Olemiss540
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Re: Best way to short the equity market

Post by Olemiss540 » Sat Mar 03, 2018 7:07 pm

Tyler Aspect wrote:
Sat Mar 03, 2018 6:59 pm
Olemiss540 wrote:
Sat Mar 03, 2018 6:38 pm
livesoft wrote:
Sat Mar 03, 2018 6:08 pm
Login to your brokerage account and submit your order:

Image

Be sure to click "Confirm", too. It is really that easy.
Can we sticky this post? Would help for all of the market timing posts as to how to followup with one's gut feeling about the market direction.
There is unlimited downside risk when selling uncovered short. Not recommended.
Exactly.....
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

livesoft
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Re: Best way to short the equity market

Post by livesoft » Sat Mar 03, 2018 7:08 pm

Tyler Aspect wrote:
Sat Mar 03, 2018 6:59 pm
There is unlimited downside risk when selling uncovered short. Not recommended.
Well, I've never done it.

I've also read this "unlimited downside risk" which is another way of saying that the thing shorted could go to infinity in price. We all know that things aren't going to infinity in our lifetimes, so whenever I see that phrase, I always laugh at the hyperbole.
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lee1026
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Re: Best way to short the equity market

Post by lee1026 » Sat Mar 03, 2018 7:26 pm

If you are looking for a pure short, CME's S&P 500 futures is fairly good. It allows for a lot of leverage, so you can probably get as much exposure as you want on just that cash account. It is extremely liquid and cheap to trade, with no borrowing fees that are normally attached to these things.

If you want to limit how much risk you take, you buy index PUTS on the index. For shorter time horizons, liquidity is pretty good.
I've also read this "unlimited downside risk" which is another way of saying that the thing shorted could go to infinity in price. We all know that things aren't going to infinity in our lifetimes, so whenever I see that phrase, I always laugh at the hyperbole.
Things can't go to infinity, but the S&P 500 can very well triple in a decade or two; you need a fair amount of capital to short things and not get margin called; far more than you do when you go long.

Good Listener
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Re: Best way to short the equity market

Post by Good Listener » Sat Mar 03, 2018 7:30 pm

Livesoft identified the easiest way in the equity market, shorting SPY. There is another way that actually requires a lot less cash to maintain the position, which is simply to open a futures account at something like Interactive Brokers and short the Emini S&P futures (symbol is ES). Very simple but you need to understand how much you control and are exppsed to per future contract. You will also need to understand the settlement dates of the different contracts but you can get xcontracts ontracts out for at least a year with good liquidity. Then you simply roll forward expiring contracts as long as you want. Best is using quarterly contracts and rolling them as they are unbelievably liquid.
Last edited by Good Listener on Sat Mar 03, 2018 7:32 pm, edited 1 time in total.

libralibra
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Re: Best way to short the equity market

Post by libralibra » Sat Mar 03, 2018 7:31 pm

livesoft wrote:
Sat Mar 03, 2018 7:08 pm
Tyler Aspect wrote:
Sat Mar 03, 2018 6:59 pm
There is unlimited downside risk when selling uncovered short. Not recommended.
Well, I've never done it.

I've also read this "unlimited downside risk" which is another way of saying that the thing shorted could go to infinity in price. We all know that things aren't going to infinity in our lifetimes, so whenever I see that phrase, I always laugh at the hyperbole.
It doesn't "go to infinity", but just keeps increasing so your losses are uncapped.

However, in practical terms, I guess your losses are capped at your networth, or whenever they finally call your margin and close your account.

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Re: Best way to short the equity market

Post by Pajamas » Sat Mar 03, 2018 7:42 pm

drk wrote:
Sat Mar 03, 2018 6:56 pm
I'd like to propose a law of contrarian investing: if you go to a Bogleheads forum for advice on how to short the market, you have no business shorting the market.
I agree with this in general, but the choice of this forum in particular makes it humorous.

b0chatma, I am not against it in principle, but I would strongly advise you not to short the market as a whole or any sector of it or any particular equity or even trade options until you have a much better understanding of it. You need to understand the risks, why you can't short in retirement accounts and have to use inverse ETFs instead, and why brokers have additional requirements for margin accounts and trading options over a cash account. You need to understand margin requirements, how dividends work on stocks you are short, etc.

I would suggest reading this book. It may be available at your library.

https://www.amazon.com/Make-Money-Selli ... B003VWCBUQ

awval999
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Re: Best way to short the equity market

Post by awval999 » Sat Mar 03, 2018 7:45 pm

Shorting SPY won't bankrupt you. It's SPY. You can always get out.

What ruins lives is naked shorting (on margin no less) biotechs or something similar that can quickly gap up 2, 3 or 5 fold at any time.

John Z
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Re: Best way to short the equity market

Post by John Z » Sat Mar 03, 2018 8:02 pm

Check out the Vanguard Market Neutral Fund Investor Shares at
https://personal.vanguard.com/us/funds/ ... irect=true
The downside is you need a minimum of $250K.

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Re: Best way to short the equity market

Post by lack_ey » Sat Mar 03, 2018 8:17 pm

John Z wrote:
Sat Mar 03, 2018 8:02 pm
Check out the Vanguard Market Neutral Fund Investor Shares at
https://personal.vanguard.com/us/funds/ ... irect=true
The downside is you need a minimum of $250K.
That's not short. It's market neutral.


The most efficient way to short the market is generally via S&P 500 e-mini futures, which are incredibly liquid. The level of exposure is consistent over time in the sense that one contract represents $50 x the level of the S&P 500 index worth of underlying S&P 500 stocks. You just have to roll over the position to the next contract every couple of months. Actually, you probably don't even need to use front-month contracts as there's reasonable liquidity a bit out as well. The drawback for some retail investors would be that $50 x the index level is around $134k, and you can only trade whole numbers of contracts, so the unit size is unwieldy. Also, many brokerages do not allow futures in Roth IRAs.

A combination of options could be used for a low cost as well.

When selling stocks/ETFs short there is a borrowing cost.

MrPotatoHead
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Re: Best way to short the equity market

Post by MrPotatoHead » Sat Mar 03, 2018 8:36 pm

You might want to review the inverse offering located here:

https://www.guggenheiminvestments.com/m ... ty-inverse

example:

Inverse Dow 2x Strategy; Seeks to provide investment results that match, before fees and expenses, 200% of the inverse (opposite) of the performance of the Dow Jones Industrial Average℠ on a daily basis.

The ERs and fees are killers, but this is for trading not holding.

b0chatma
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Re: Best way to short the equity market

Post by b0chatma » Sat Mar 03, 2018 8:43 pm

I didn't consider S&P emini approach so I'll look into this further. I appreciate the suggestions.

WinnFlak
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Re: Best way to short the equity market

Post by WinnFlak » Sat Mar 03, 2018 9:07 pm

If you are absolutely certain stocks are headed down "for over a year", just buy SDOW and put every penny you can in to it. Tracking is irrelevant. ER is irrelevant. You will make a tremendous return. SDOW is up 9% in the past week and 15% for the past 30 days.

Cash out your 401k. Buy SDOW with every dollar you've got. Hold it for at least a year. Send us a post card from your yacht. :D

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Re: Best way to short the equity market

Post by dogagility » Sat Mar 03, 2018 9:22 pm

lws6772 wrote:
Sat Mar 03, 2018 5:40 pm
Tycoon wrote:
Sat Mar 03, 2018 5:27 pm
You'll shoot your eye out.
Or maybe even, "you'll short your eye out."
Is this another way to Stop Short... a la Frank Costanza?

jdb
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Re: Best way to short the equity market

Post by jdb » Sat Mar 03, 2018 10:05 pm

drk wrote:
Sat Mar 03, 2018 6:56 pm
I'd like to propose a law of contrarian investing: if you go to a Bogleheads forum for advice on how to short the market, you have no business shorting the market.
I belong to a gym with fancy spa with steam room. Attendant recently told me story, was early morning, couple guys in steam room, woman wearing robe inadvertently entered men’s spa, walked into steam room and discarded her robe, wearing nothing else. One of guys politely said that thought she was in wrong place. Said they never saw anyone move faster. So same response to the OP, suggest wrong room. Good luck.

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Re: Best way to short the equity market

Post by Alexa9 » Sat Mar 03, 2018 10:42 pm

Have you seen "The Big Short?" It's not a terrible idea and I wouldn't be so quick to dismiss OP's idea. We assume that the market will always trend upwards. There was another poster that did tactical asset allocation when the market swung that was also brushed off as a Motley Fool Market Timer type but if you think you can predict the market then more power to you. I wouldn't bet a lot on it but protective puts may be useful to protect the downside. I would simply shift to a slightly more conservative allocation after a long bull market.

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Re: Best way to short the equity market

Post by itstoomuch » Sat Mar 03, 2018 10:55 pm

Go to cash.
viewtopic.php?t=203792
:mrgreen:
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Re: Best way to short the equity market

Post by magicrat » Sat Mar 03, 2018 10:57 pm

Whatever you do, please keep us posted on the results!

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market timer
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Re: Best way to short the equity market

Post by market timer » Sat Mar 03, 2018 10:59 pm

Check with your brokerage on the Roth. I have a Roth and am able to short futures in this account.

22twain
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Re: Best way to short the equity market

Post by 22twain » Sat Mar 03, 2018 11:06 pm

Tycoon wrote:
Sat Mar 03, 2018 5:27 pm
You'll shoot your eye out.
Ah, that takes me back to visiting Higbee's when I was a kid! 8-)

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NYC_Guy
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Re: Best way to short the equity market

Post by NYC_Guy » Sat Mar 03, 2018 11:10 pm

Buy long-dated deep out-of-the money puts on SPY.

Best of luck to you.

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Re: Best way to short the equity market

Post by arcticpineapplecorp. » Sat Mar 03, 2018 11:17 pm

you're trying to market time. Pure and simple. Do you know what Jack Bogle has said about market timing?
After more than 55 years in this business, I have absolutely no idea how to forecast these swings in investor emotions.*
* I’m not alone. I don’t know anyone who has done so successfully, or even anyone who knows anyone who has done so. In fact, 70 years of financial research show that no one has done so. (source: page 18, The Little Book of Commonsense Investing)
If you haven't read Larry Swedroe's "Rational Investing in Irrational Times" I'd highly suggest it. You're making many of the mistakes common to investors. Here they are as I see it (there are more but I'm limited in time):

Mistake 37 Do you confuse speculating with investing?
Mistake 38 Do you try to time the market?

In the chapter titled "Mistake 6 Do you allow yourself to be influenced by a herd mentality?" Larry talks about the problem with shorting:
...there is no way to predict just how irrational prices might get. For example, hindsight reveals that Amazon may fave looked irrationally priced at 50, temping rational investors to short the stock. Unfortunately, it became even more "irrationally" priced, reaching over 100. A "rational" investor shorting the stock at 50 would have been proven correct in the long ter,m but he might also have been long dead, as margin calls might have forced him to cover his position well before the "inevitable" collapse occurred. (page 29, Rational Investing in Irrational Times)
If you thought the P/E of Amazon at 50 or 100 was high, the P/E of Amazon is now 327.78!! (source: https://www.google.com/search?q=amazon+ ... fox-b-1-ab)

Keynes said "Markets can remain irrational longer than you can remain solvent."

It's time in the market, not timing the market that matters.

You are talking about "down trends" and two year periods, etc. The stock market is a giant distraction to the business of investing. You're focusing on the short term rather than the long term. What does it matter what happens over a two-year downtrend if your time horizon is longer than that?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

broslami
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Re: Best way to short the equity market

Post by broslami » Sun Mar 04, 2018 12:46 am

Sell puts against the S&P

When it crashes you can buy in cheap and earn income in the meantime

stlutz
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Re: Best way to short the equity market

Post by stlutz » Sun Mar 04, 2018 1:09 am

I would like to disagree with the statements that one should not come here to discuss shorting the market. This is the most informed investing site on the internet. If one wants good advice, they *should* come here.

I don't have anything to add to the suggestions for how to do it (futures or put options).

The problems with doing it are twofold: 1) over the long term, the market does trend upward. The odds are against you. 2) Whether you are directly borrowing money or buying puts, you are still paying to borrow (i.e. margin costs are embedded in the price of put options. So, you're losing money borrowing to make a bet where the odds are against you and where the payoff is not that huge.

If you don't like the stock market now for whatever reason, a better option is simply to buy bonds.

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nedsaid
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Re: Best way to short the equity market

Post by nedsaid » Sun Mar 04, 2018 1:14 am

radiowave wrote:
Sat Mar 03, 2018 5:55 pm
Dumb question, what does shorting the equity market mean?
The act of shorting is borrowing a security that you don't own and selling it. The real owner of the security is unaware this is happening. What you have to do is to reimburse the owner of the security for the dividend the security pays. There are also other fees involved. If the security drops in price, you can buy it back and make a profit. In other words, you buy back the security for less than what you sold it. It works the other way too. The security can zoom in price, thus putting you in a losing position, theoretically your potential for losses is unlimited.

If you try to short the equity market, this is a risky strategy. The market is up something like 60% of the time on a daily basis, up 2/3 to 3/4 of the time on a yearly basis. You can see the odds don't favor the person who shorts. It is a form of market timing, and almost nobody gets it right because there is a certain amount of unpredictability in the markets. This is why I am a long only investor, the buying and holding of the US Equity market has odds in its favor.
A fool and his money are good for business.

libralibra
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Re: Best way to short the equity market

Post by libralibra » Sun Mar 04, 2018 1:31 am

broslami wrote:
Sun Mar 04, 2018 12:46 am
Sell puts against the S&P

When it crashes you can buy in cheap and earn income in the meantime
This logic is deeply flawed :oops:

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randomizer
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Re: Best way to short the equity market

Post by randomizer » Sun Mar 04, 2018 1:52 am

Good luck with this. I hope it makes you very rich, and quickly.
87.5:12.5, EM tilt — HODL the course!

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Kalo
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Joined: Sat May 25, 2013 1:01 pm

Re: Best way to short the equity market

Post by Kalo » Sun Mar 04, 2018 2:03 am

WinnFlak wrote:
Sat Mar 03, 2018 9:07 pm
If you are absolutely certain stocks are headed down "for over a year", just buy SDOW and put every penny you can in to it. Tracking is irrelevant. ER is irrelevant. You will make a tremendous return. SDOW is up 9% in the past week and 15% for the past 30 days.

Cash out your 401k. Buy SDOW with every dollar you've got. Hold it for at least a year. Send us a post card from your yacht. :D
I realize one is not supposed to hold an instrument like SDOW, but it's still interesting to look at a max chart of SDOW and think about being long it. (I also realize the quoted post is not making a serious recommendation but rather a point.)

I shorted the triple Qs back when they were still the quadruple Qs. Pre Boglehead days. Even then I closed out my short before the end of the day. I remember having the honest feeling that I had no basis for opening or closing the trade.

If I ever did want to short the market because I thought I knew something, I would like to short individual issuances rather than a basket. I would like to pick a sick stock in a sick industry that had not yet bottomed. Knowing which stock that was would be a dream world. But I don't know what stock that is.

It's not just a parable. Slow and steady really does win the race.

Diversify between stocks and bonds and let time be on your side, and not working against you like it can with financial weapons of mass destruction.

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.

Ragnoth
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Re: Best way to short the equity market

Post by Ragnoth » Sun Mar 04, 2018 3:39 am

Please don’t try to time the market.

But if you must, buy year long puts (leaps) on SPY or other heavily traded index fund ETFs. Go deep in the money, and the payout starts to look enough like short selling for most people’s needs.

I usually find options superior to inverse ETFs, and it gets you around the restrictions against short selling and/or margin.

msk
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Re: Best way to short the equity market

Post by msk » Sun Mar 04, 2018 4:08 am

In my younger days when I felt that the market was headed down I used to sell one-year covered calls on SPY. Market falls, then at least I collected around $50k per million I had in stocks. Market goes up, I collected the $50k + dividends. Quite safe...

b0chatma
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Re: Best way to short the equity market

Post by b0chatma » Sun Mar 04, 2018 9:45 am

I agree that shorting has worse odds than going long when you look at doing it over the long run. I think shorting can be done successfully in very select instances when the market is extremely expensive. I definitely don't think you should just sell short and hold on to it. You have to have an entry and exit strategy which allows you to hold on for long-term gains or get out at a reasonable loss if the market goes against you.

People are so strongly against market timing but we all do it to some extent. Most people don't go completely dollar cost averaging. For example lets say I just received a windfall amount of $1mm and before that, I had 0. Would any of you recommend putting all of this money to work right now in this bond or equity market? We are in a rising interest rate environment which means prices for bonds are going to continue to get creamed. It's much smarter to wait until the yield curve flattens or inverts and the 10-year treasury curve hits +5% before you start buying long bonds again. That's market timing.

For equities why would you buy equities right now with that windfall when the average S&P PE ratio is +32. Buying at an average PE of +32 means that you are locking in an average return on equities of 3.125% year at that rate (ex. 1/32 = .03125). Who would do that? Warren from a value investing perspective that's just crazy to buy that expensive. You wait until the market pulls back and PEs get cheap and by then. a PE of 15 would return on average double what the 32 would. Double return compounded over 20 years results in a massive difference.

So trend following and value investing both "times" the market technically. Yes, value investing doesn't even pay attention to price "Mr. Market" but value investors do time the Price multiples such as P/E and P/book.

Are there any value investors in this chat? If so, are you buying now?

Also are there any investors in this chat that bought at the highs of the 99' tech boom/bust and held it? When it comes down to it you can just look at PE ratios and say that prices are expensive and that I'm not a buyer here. Is it aggressive to consider selling short these prices once the trend turns down? Yes, but isn't it also aggressive to consider sitting on your hands or worse riding the unknown for possibly a multi-year bear? Time value is important to consider as well. If you are making negative returns for the next 7 years which is what the GMO predicted forecast has us making in the equity market and bond market.

https://www.cmgwealth.com/ri/radar-equi ... Y.facebook

Who has time to sit for 7 years. Not only that but 1mm at the beginning of this period will be substantially lower at the end of that 7 years.

Was 2008-2018 a great time for the passive investor. Yes but when prices are this expensive how do you make a good return when prices are falling back to the mean or below (which takes years)? In my opinion, the only answer is to be active. Just a 2% difference in your portfolio a year over 20 years has a massive impact.

So knowing the probable outcome I can't sit and wait blindly as the trend turns down. Not at these P/Es. If the trend turns back up yes, sure keep riding equities but turning down at this level and being willing to ride that ride blindly. Yikes. That's a scary unknown.

My only question is what is the best investment during a multiyear bear. We all know it's not equities. Bonds are also in a bear so It's not bonds yet. Real estate is going to get hit just like bonds so it's not that. That doesn't leave to many options. Commodities which definitely require trend following and currencies which also require trend following. I don't like commodities because nearly all the ETFs use some type of derivative to track the underlying asset so you are always dealing with some type of contango or backwardation. Currencies are ok but for 100% of your portfolio allocation it doesn't make sense. So to me the best option I have right now is an allocation of T-bills, a little currencies (using trend following) and shorting equities (using trend following).

Just my general thinking at the moment.

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bottlecap
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Re: Best way to short the equity market

Post by bottlecap » Sun Mar 04, 2018 10:13 am

I’d rather sit blindly than run around blindly.

I predict this will be a thread that will have 7 pages of posts by 2023.

JT

goblue100
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Re: Best way to short the equity market

Post by goblue100 » Sun Mar 04, 2018 10:25 am

b0chatma wrote:
Sun Mar 04, 2018 9:45 am


Just my general thinking at the moment.
You make a lot of good points. I believe it is the execution of the idea that is the difficult part. Timing(most people are "right" way too early), not getting whipsawed, having the fortitude to stay with your conviction and the presence of mind to know when you have been proven wrong. If you do this, I really hope you will real time post the position and when it closes. Could be an educational experience for all of us.
Some people are immune to good advice. - Saul Goodman

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