What to Short When the Rally Dies

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April 17, 2009 10:22am NYSE:FAZ NYSE:SRS

down-arrow1I have been droning on for what seems an eternity (a few weeks) that I feel this market rally is just overdone and due for a fall. I still feel that way, but am getting to the point where I am going to put some money where my mouth is.

Now, don’t get me wrong. I have been very happy to be wrong for the last month as the rally has been very good to me. Core large long holdings like Dow Chemical (DOW) (which I significantly added to at $6.80 in March and again at $9 in early April), AutoNation (AN), Sears Holdings (SHLD) and Wells Fargo (WFC) have all seen tremendous share price increases of at least 50% since the March lows (I am still down 10% in Wells Fargo overall though). This makes up for the gut-wrenching carnage in January and February, though Sears and AutoNation are up 50% and 60% YTD respectively……………..

……………There are over 6 million folks without jobs now, the housing industry is simply in shambles and getting worse, foreclosures are surging, Q1 GDP is decidedly negative and Q2 looks only marginally – if any – better. Commercial Real Estate is the next time bomb to drop on banks and that fuse is only just beginning to burn, and the Federal Reserve is just about all out of ammo unless they want to start paying people to borrow. In short, not too much to be optimistic about.

Do I short CRE with the SRS ETF? Not for me. REITs are already on death’s doorstep, so buying in there might be a bit like going hunting and shooting a deer caught on a trap – not very satisfying or meaningful.

Short financials with FAZ? Not too sure about that one either. While the rally there has been spectacular and unwarranted, it has become clear that the US Government will stop at nothing, including changing accounting rules, bogus “stress tests” and more capital infusions to make sure the banks are propped up. That said, I am hesitant to bet against the guy with the ability to change the rules of the game on a whim to make sure he wins.

Full Story:  http://seekingalpha.com/article/131474-what-to-short-when-the-rally-dies?source=yahoo

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