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  #1  
Old 02-18-2017, 11:49 AM
jas66Kent jas66Kent is offline
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Default When should we short the market during this Trump bubble

Just wanted to hear some viewpoints on this from others.

I work in the risk side and my spidey sense is already starting to tingle. Lots of capital being diverted to buying stocks, loosening of financial and environmental regulations, etc.. About 30% of the rise of the Dow during Trumps presidency is actually being driven by the vampire squid (GS) stock. That says a lot about the drivers of the current bubble.

My expertise on this matter is telling me that a pretty significant crash is on the horizon given the economic and financial fudamentals of the situation, and that by correctly timing it a big pot of money could be made if you short the market at the right time.
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Old 02-18-2017, 12:08 PM
Jim Bob Cooter Jim Bob Cooter is offline
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Cool story
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Old 02-18-2017, 02:39 PM
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i'm going long on the american dream
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Old 02-18-2017, 03:18 PM
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Originally Posted by jas66Kent View Post
My expertise on this matter is telling me that a pretty significant crash is on the horizon given the economic and financial fudamentals of the situation, and that by correctly timing it a big pot of money could be made if you short the market at the right time.
Why don´t you short it now? If you´re right, given how much you could invest, you could make a big pot now, even if you might have gotten an even bigger pot by waiting.
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Old 02-18-2017, 03:22 PM
jas66Kent jas66Kent is offline
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Why don´t you short it now? If you´re right, given how much you could invest, you could make a big pot now, even if you might have gotten an even bigger pot by waiting.
Disagree. Market still has a ways to go before reaching a peak.

Better to wait and reduce transaction costs by doing it only once.
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Old 02-18-2017, 03:45 PM
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Colymbosathon ecplecticos Colymbosathon ecplecticos is offline
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Originally Posted by jas66Kent View Post
Disagree. Market still has a ways to go before reaching a peak.
Then you should go long now.
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Old 02-18-2017, 04:21 PM
nonlnear nonlnear is offline
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Originally Posted by jas66Kent View Post
Disagree. Market still has a ways to go before reaching a peak.

Better to wait and reduce transaction costs by doing it only once.
Do you wait to lose traction before fastening your seat belt?

What do you mean by "doing it only once"? What mechanism are you thinking is a prudent way to "short the market"?

I guess it comes down to what the overall strategy is, and what information one believes is, or ought to be, actionable. If you're saying things like "still has a ways to go" that sounds to me like you are planning on being able to fairly precisely time the peak. That sounds dangerous to me.

That said, my spider sense is also tingling. For me the big tell is how much less is being written today* about the markets being overpriced than there was in 2014-16, despite the rally having continued to new heights. One can look at market history and say we're overdue, but that's oversimplifying things. It could come down tomorrow, but it could just as well rally for another two years. You know, "can remain irrational longer than you can remain solvent" and all. If you're betting on a large correction, leverage is incredibly cheap. So cheap that I can't imagine it actually makes sense to avoid starting your hedge to save on transaction costs if you believe a crash is even remotely likely.

* By that I mean how much content about overpriced markets filters in the the financial corners of MSM type outlets, not the more technical financial trade press.

Last edited by nonlnear; 02-18-2017 at 04:35 PM..
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Old 02-20-2017, 01:41 AM
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Quote:
Originally Posted by jas66Kent View Post
Just wanted to hear some viewpoints on this from others.

I work in the risk side and my spidey sense is already starting to tingle. Lots of capital being diverted to buying stocks, loosening of financial and environmental regulations, etc.. About 30% of the rise of the Dow during Trumps presidency is actually being driven by the vampire squid (GS) stock. That says a lot about the drivers of the current bubble.

My expertise on this matter is telling me that a pretty significant crash is on the horizon given the economic and financial fudamentals of the situation, and that by correctly timing it a big pot of money could be made if you short the market at the right time.
The banking industry was overly penalized by Dodd-Frank. The pendulum has swung too far back and regulators have now essentially closed the barn doors after the horses have already gotten out.

Much of the recent rise in the markets is due to widespread belief that the most onerous parts of Dodd-Frank could see the chopping block. Even if you don't believe that Dodd-Frank was too punitive to the banks, nobody can deny that it is incredibly resource-intensive for them to comply with ALL of the regulations that have been imposed. Just the hope of some relief is enough to drive prices upward. While the first part is my opinion, the second part is a fact.

Ceteris paribus, I don't see that GS's resurgence in share price is indicative of anything nefarious, and, certainly, not yet in any case...
"Bank stocks are up. The economy must be about to crash again. Also, Trump."
Is that the bulk of your argument drawn from your worldly educational pedigree and expertise?


Quote:
Originally Posted by nonlnear View Post
Do you wait to lose traction before fastening your seat belt?

What do you mean by "doing it only once"? What mechanism are you thinking is a prudent way to "short the market"?


I guess it comes down to what the overall strategy is, and what information one believes is, or ought to be, actionable. If you're saying things like "still has a ways to go" that sounds to me like you are planning on being able to fairly precisely time the peak. That sounds dangerous to me.

That said, my spider sense is also tingling. For me the big tell is how much less is being written today* about the markets being overpriced than there was in 2014-16, despite the rally having continued to new heights. One can look at market history and say we're overdue, but that's oversimplifying things. It could come down tomorrow, but it could just as well rally for another two years. You know, "can remain irrational longer than you can remain solvent" and all. If you're betting on a large correction, leverage is incredibly cheap. So cheap that I can't imagine it actually makes sense to avoid starting your hedge to save on transaction costs if you believe a crash is even remotely likely.

* By that I mean how much content about overpriced markets filters in the the financial corners of MSM type outlets, not the more technical financial trade press.

Especially the bolded..
  • I also see no reason to wait to hedge. Waiting until you can see the market top before calling it would be expensive because the risk premiums would then skyrocket because it's likely many others will also see it at that point.

  • I also feel that transaction costs are de minimis in the case where one is expecting a large market correction. Leverage is pennies on the dollar on a large move. As such, there is no need to worry about acting only once, either. Worry more about having on the correct position than about how many times it took you to get there, imo.

  • For one example, I think a diagonal bear put spread on SPX wouldn't be a bad play today. Buy ATM DEC 2018 puts and sell shorter-term OTM puts to finance it in part. When the near-term options decay, buy them back and sell more. Be realistic about the price points, e.g., SPX isn't going to go to zero. If the market drops big like the assumption here, you'll earn the difference in the strikes less transaction costs. If the market stays neutral, and you do this through December, 2018, you'd likely earn enough in premium to get the long position for free. If the market rockets upward, you'll have paid for the hedge. Oh, well. Insurance isn't usually free.

I too think it's important to note that recessions are a normal part of the economic cycle, and this current bull market is aging. Saying we're overdue, while it may be oversimplified, probably isn't wrong per se. Something else that might support a pullback is that the average P/E ratio in the entire S&P 500 is about 25.2 as of the middle of last week (historical avg is approx. 16).

There was also a lot of what could be viewed as late cycle acquisitions over the summer, but then we got the Trump shocker; now we're in a bit of a resurgence. I think it's every expectation that his administration is going to do what they can to let the economy run a lot 'hotter' than Obama ever did. The hope is that he can increase inflation and jump start the economy through deregulation, tax cuts, credibly irresponsible borrowing and, possibly, a massive public works project. #MAGA I don't foresee that a crash is imminent this year or next, but anything is possible and I don't see any reason why one should wait if s/he's extremely bearish.
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  #9  
Old 02-20-2017, 09:00 AM
nonlnear nonlnear is offline
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Quote:
Originally Posted by willel2338 View Post
The banking industry was overly penalized by Dodd-Frank. The pendulum has swung too far back and regulators have now essentially closed the barn doors after the horses have already gotten out.

Much of the recent rise in the markets is due to widespread belief that the most onerous parts of Dodd-Frank could see the chopping block. Even if you don't believe that Dodd-Frank was too punitive to the banks, nobody can deny that it is incredibly resource-intensive for them to comply with ALL of the regulations that have been imposed. Just the hope of some relief is enough to drive prices upward. While the first part is my opinion, the second part is a fact.

Ceteris paribus, I don't see that GS's resurgence in share price is indicative of anything nefarious, and, certainly, not yet in any case...
"Bank stocks are up. The economy must be about to crash again. Also, Trump."
Is that the bulk of your argument drawn from your worldly educational pedigree and expertise?
To pile in on the D-F bit: Dodd-Frank hadn't even finished being rolled out. Things were scheduled to get even worse. Commodity markets were about to experience another severe liquidity crunch in 2018 when the threshold for being a Major Swap Participant was set to drop from $8B down to $3B. Banks had already pulled back from a lot of commodities activity a little while back, but some of that was anticipatory of the $3B limit. Now that the drop to $3B has been killed liquidity should be improving.

There were some other really stupid regulations from D-F at work in commodities markets, like completely made-up tests for whether cross-commodity hedges would count as reducing or increasing one's notional exposure. i.e. Whether fuel hedges would count as reducing the risk of one's future power sales. All hedging is done on a forward basis (obviously, beign hedges), but the test foer whether a cross-commodity position could be counted as a hedge was determined by the correlation between the spot indices. Utterly moronic. (You can tell from the rule's construction that it was conceived by currency traders, becuse in currency markets you can actually make a meaningful connection between the spot and forward correlations. But it maeks no sense for physical commodities.) And that's just two quibble swith the D-F commodity markets rules. There are obviously much larger problems in bankign world, as banking world is much larger.

Basdically, Dodd-Frank was a yuge steaming pile. A couple prudent measures mixed with a lot of ignorant crap obviously written by people with no experience in the markets that the rules were applied to. But it was a "fix" for the crash, so anybody saying bad things about it must obviously be against prudent regulation.

Quote:

Especially the bolded..
  • I also see no reason to wait to hedge. Waiting until you can see the market top before calling it would be expensive because the risk premiums would then skyrocket because it's likely many others will also see it at that point.

  • I also feel that transaction costs are de minimis in the case where one is expecting a large market correction. Leverage is pennies on the dollar on a large move. As such, there is no need to worry about acting only once, either. Worry more about having on the correct position than about how many times it took you to get there, imo.

  • For one example, I think a diagonal bear put spread on SPX wouldn't be a bad play today. Buy ATM DEC 2018 puts and sell shorter-term OTM puts to finance it in part. When the near-term options decay, buy them back and sell more. Be realistic about the price points, e.g., SPX isn't going to go to zero. If the market drops big like the assumption here, you'll earn the difference in the strikes less transaction costs. If the market stays neutral, and you do this through December, 2018, you'd likely earn enough in premium to get the long position for free. If the market rockets upward, you'll have paid for the hedge. Oh, well. Insurance isn't usually free.

I too think it's important to note that recessions are a normal part of the economic cycle, and this current bull market is aging. Saying we're overdue, while it may be oversimplified, probably isn't wrong per se. Something else that might support a pullback is that the average P/E ratio in the entire S&P 500 is about 25.2 as of the middle of last week (historical avg is approx. 16).

There was also a lot of what could be viewed as late cycle acquisitions over the summer, but then we got the Trump shocker; now we're in a bit of a resurgence. I think it's every expectation that his administration is going to do what they can to let the economy run a lot 'hotter' than Obama ever did. The hope is that he can increase inflation and jump start the economy through deregulation, tax cuts, credibly irresponsible borrowing and, possibly, a massive public works project. #MAGA I don't foresee that a crash is imminent this year or next, but anything is possible and I don't see any reason why one should wait if s/he's extremely bearish.
One minor quibble: Finanicing ATM puts with OTM puts seems like a strategy to bet on a modest correction, not a large one. I've never understood the obsession option traders seem to have with making strategies self-financing. Seems like pissing commissions away to me - unless it's a true arbitrage, which is obviously pretty much never. But if the strategy you described is one that many people are actually doing out in the wild, then I thank you for subsidizing my OTM puts.

Last edited by nonlnear; 02-20-2017 at 09:11 AM..
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Old 02-20-2017, 09:22 AM
d123454321 d123454321 is offline
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Regarding Trump bubble. The S&P 500 is up about 10% since the close on election night.

But many studies indicate Trump's tax plan of a tax reduction to 20% corporate rate will boost S&P earnings by about 12%. If fully implemented, then the market has actually NOT risen enough to price that in. Then add on reduced impact of Dodd-Frank, and other stimulative infra. spending, it can go a lot higher than people think.

The S&P was sideways for 1.5 years from early 2015 to mid-late 2016. It just broke out and made new highs, historically the rally can last a very long time. See 1994-1995--S&P broke out from 1+ year sideways area, and was "over valued", but tripled in the next 5 years.

Is the market cheap? No. But that doesn't mean it has to go down very soon, which is what shorting relies on.
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