How to be short-ready for the upcoming downturn
How can you improve your odds of success when selling short a market or stock that’s been going straight up like we’ve seen since November 8th 2016? One way is to spot heavy sell-offs in huge volume on a Commitment Of Traders (COT) weekly chart. The resource we tracked as Institutional Investors can be found here: www.cftc.gov
If a market has peaked in price, it then follows that the supply of shares that large commercial funds are willing to dole out to the public outweighs the amount of shares that current holders and new buyers seek to own. So when the balance shifts from heavy demand to heavy supply, expect a market or stock to fall 5-10% or even more within a single week.
One way to stay ahead of the rest of the crowd and get better pricing is to look at the markets underlying sectors and cap weighted stocks that make up those sectors and markets. When a market leader starts to loose upward support you can spot distribution by analyzing the rate of change in the volume.
COT report from Oct-November 2016
Take note of the large asset managers accumulation.
COT Report from Nov-March
The crowd will continue to buy the dips until it fails. A clue a top is near is when someone comes up with an Acronym for a group of trendy winners. This usually is in the late stages of an exhaustive top. At this time it also pays to be somewhat of a contrarian because by the time an acronym is created such as BRIC (Brazil, Russia, India, China) and its announced by every “analyst” on CNBC or Bloomberg it’s time to start to exit. In fact a number of you reading this now, may not have even heard of the acronym. Today, only India can lure global investors, China struggles with its slow down, while Brazil and Russia are in heavy recessions.
The more recent acronym, FANG (Facebook, Apple, Netflix and Google) is a perfect example of when it’s time to start looking for the exit. If you take a look underneath the hood of these stocks, you’ll find that over the last 3 months, the top money managers of the largest funds in the world have not been buying these stocks. Here is a list compiling the number of top rated fund managers and what they were buying. Notice there are no Facebook, Apple, Netflix or Google.
Let’s say you miss the initial short-sale entry that happened today April 5th 2017. No problem, keep your eye on the order flow as price attempts to take out the recent high.
FYI, The Nasdaq fell from its May 2 2011 peak of 2887 to an Oct 4 low of 2298, a 20.4% bear market correction.
Good luck in this new short.