March 2025

A Refresher Course at Short Selling School

Some asset classes are reflecting the fact that we are already in a full-blown recession, while others are not. In case I am wrong and we DO go into a recession, knowing how to sell short stocks will be a handy skill to have.

It will become essential to be knowledgeable about all the different ways to add downside protection.

While you are all experts in buying stocks, selling them short is another kettle of fish.

I, therefore, think it is timely to review how to make money when prices are falling. I call it Short Selling School 101.

I don’t think we are going to crash to new lows from here, maybe drop only 10% at worst. So some of the most aggressive bearish strategies described below won’t be appropriate.

If you have big positions in single stocks, like Apple (AAPL), you can execute the same kind of strategy. Selling short the Apple call options to hedge an existing long in the stock looks like the no-brainer here. You should sell one option contract for every 100 shares you own.

There is nothing worse than closing the barn door after the horses have bolted or hedging after markets have crashed.

No doubt, you will receive a wealth of short-selling and hedging ideas from your other research sources and the media right at the next market bottom.

That is always how it seems to play out, great closing the barn doors after the horses have bolted.

So I am going to get you out ahead of the curve, putting you through a refresher course on how to best trade falling markets now, while stock prices are still rich.

I’m not saying that you should sell short the market right here. But there will come a time when you will need to do so.

Watch my Trade Alerts for the best market timing. So here are the best ways to profit from declining stock prices, broken down by security type:

Bear ETFs

Of course, the granddaddy of them all is the ProShares Short S&P 500 Fund (SH), a non-leveraged bear ETF that is supposed to match the fall in the S&P 500 point for point on the downside. Hence, a 10% decline in the (SPY) is supposed to generate a 10% gain in the (SH).

In actual practice, it doesn’t work out like that. The ITF has to pay management operating fees and expenses, which can be substantial. After all, nobody works for free.

There is also the “cost of carry,” whereby owners have to pay the price for borrowing and selling short shares. They are also liable for paying the quarterly dividends for the shares they have borrowed, around 2% a year. And then you have to pay the commissions and spread for buying the ETF.

Still, individuals can protect themselves from downside exposure in their core portfolios by buying the (SH) against it (click here for the prospectus). Short-selling is not cheap. But it’s better than watching your gains of the past seven years go up in smoke.

Virtually all equity indexes now have bear ETFs. Some of the favorites include the (PSQ), a short play on the NASDAQ (click here for the prospectus ), and the (DOG), which profits from a plunging Dow Average (click here for the prospectus).

My favorite is the (RWM) a short play on the Russell 2000, which falls 1.5X faster than the big cap indexes in bear markets (click here for the prospectus).

Leveraged Bear ETFs

My favorite is the ProShares Ultra Short S&P 500 (SDS), a 2X leveraged ETF (click here for the prospectus). A 10% decline in the (SPY) generates a 20% profit, maybe.

Keep in mind that by shorting double the market, you are liable for double the cost of shorting, which can total 5% a year or more. This shows up over time in the tracking error against the underlying index. Therefore, you should date, not marry, this ETF, or you might be disappointed.

3X Leveraged Bear ETF

The 3X bear ETFs, like the UltraPro Short S&P 500 (SPXU), are to be avoided like the plague (click here for the prospectus).

First, you have to be pretty good to cover the 8% cost of carry embedded in this fund. They also reset the amount of index they are short at the end of each day, creating an enormous tracking error.

Eventually, they all go to zero and have to be periodically redenominated to keep from doing so. Dealing spreads can be very wide, further adding to costs.

Yes, I know the charts can be tempting. Leave these for the professional hedge fund intraday traders for which they are meant.

Buying Put Options

For a small amount of capital, you can buy a ton of downside protection. For example, the April (SPY) $182 puts I bought for $4,872 on Thursday allows me to sell short $145,600 worth of large cap stocks at $182 (8 X 100 X $6.09).

Go for distant maturities out several months to minimize time decay and damp down daily price volatility. Your market timing better be good with these because when the market goes against you, put options can go poof and disappear pretty quickly.

That’s why you are reading this newsletter.

Selling Call Options

One of the lowest risk ways to coin it in a market heading south is to engage in “buy writes.” This involves selling short call options against stock you already own but may not want to sell for tax or other reasons.

If the market goes sideways or falls, and the options expire worthless, then the average cost of your shares is effectively lowered. If the shares rise substantially, they get called away, but at a higher price, so you make more money. Then you just buy them back on the next dip. It is a win-win-win.

Selling Futures

This is what the pros do, as futures contracts trade on countless exchanges around the world for every conceivable stock index or commodity. It is easy to hedge out all of the risk for an entire portfolio of shares by simply selling short futures contracts for a stock index.

For example, let’s say you have a portfolio of predominantly large-cap stocks worth $100,000. If you sell short 1 September 2021 contract for the S&P 500 against it, you will eliminate most of the potential losses for your portfolio in a falling market.

The margin requirement for one contract is only $5,000. However, if you are short the futures and the market rises, then you have a big problem, and the losses can prove ruinous.

But most individuals are not set up to trade futures. The educational, financial, and disclosure requirements are beyond mom-and-pop investing for their retirement fund.

Most 401Ks and IRAs don’t permit the inclusion of futures contracts. Only 25% of the readers of this letter trade the futures market. Regulators do whatever they can to keep the uninitiated and untrained away from this instrument.

That said, get the futures markets right, and is the quickest way to make a fortune if your market direction is correct.

Buying Volatility

Volatility (VIX) is a mathematical construct derived from how much the S&P 500 moves over the next 30 days. You can gain exposure to it by buying the iPath S&P 500 VIX Short-Term Futures ETN (VXX) or buying call and put options on the (VIX) itself.

If markets fall, volatility rises, and if markets rise, then volatility falls. You can, therefore, protect a stock portfolio from losses through buying the (VIX).

I have written endlessly about the (VIX) and its implications over the years. For my latest in-depth piece with all the bells and whistles, please read “Buy Flood Insurance With the (VIX)” by clicking here.

Selling Short IPOs

Another way to make money in a down market is to sell short recent initial public offerings. These tend to go down much faster than the main market. That’s because many are held by hot hands, known as “flippers,” don’t have a broad institutional shareholder base.

Many of the recent ones don’t make money and are based on an as-yet unproven business model. These are the ones that take the biggest hits.

Individual IPO stocks can be tough to follow to sell short. But one ETF has done the heavy lifting for you. This is the Renaissance IPO ETF (click here for the prospectus). As you can tell from the chart below, (IPO) was warning that trouble was headed our way since the beginning of March. So far, a 6% drop in the main indexes has generated a 20% fall in (IPO).

Buying Momentum

This is another mathematical creation based on the number of rising days over falling days. Rising markets bring increasing momentum, while falling markets produce falling momentum.

So, selling short momentum produces additional protection during the early stages of a bear market. Blackrock has issued a tailor-made ETF to capture just this kind of move through its iShares MSCI Momentum Factor ETF (MTUM). To learn more, please read the prospectus by clicking here.

Buying Beta

Beta, or the magnitude of share price movements, also declines in down markets. So, selling short beta provides yet another form of indirect insurance. The PowerShares S&P 500 High Beta Portfolio ETF (SPHB) is another niche product that captures this relationship.

The Index is compiled, maintained, and calculated by Standard & Poor's and consists of the 100 stocks from the (SPX) with the highest sensitivity to market movements, or beta, over the past 12 months.

The Fund and the Index are rebalanced and reconstituted quarterly in February, May, August, and November. To learn more, read the prospectus by clicking here.

Buying Bearish Hedge Funds

Another subsector that does well in plunging markets is publicly listed bearish hedge funds. There are a couple of these that are publicly listed and have already started to move.

One is the Advisor Shares Active Bear ETF (HDGE) (click here for the prospectus). Keep in mind that this is an actively managed fund, not an index or mathematical relationship, so the volatility could be large.

Oops, Forgot to Hedge

AN AI PLAYER NOBODY'S TALKING ABOUT

Mad Hedge AI

(CLS), (MSFT), (GOOG), (GOOGL), (NVDA)

I was driving back from Salt Lake City a few weeks ago when I got a call from a former Concierge Service client who runs a drone manufacturing business.

His story is remarkable - what started as a hobby five years ago now generates $40 million in revenue, with military contracts on the horizon promising even more growth.

He keeps telling me that our weekly calls during those crucial early days were what kept him from selling to the first European conglomerate that waved a checkbook in his face.

"You told me to hold out for ten times what they were offering," he reminded me. I don't remember saying that, but who knows?

After thousands of client calls over the years, they tend to blur together. Still, he swears it was my portfolio review that convinced him to plow every nickel of profit back into engineering when his competitors were cashing out.

I'm not about to take credit for his success – the guy's a genius in his own right – but I'd be lying if I said it didn't make my day to hear that. Now he's being bombarded with takeover offers from European and Asian firms desperate for new profit streams at any cost.

That conversation got me thinking about AI stocks and where the real opportunities might be hiding.

AI fever is alive and well on Wall Street. But while tech giants like Alphabet (GOOG) (GOOGL) and Microsoft (MSFT) operate under the shadow of China's DeepSeek, the architects of artificial intelligence systems—from semiconductors to servers to sprawling data centers—have emerged as the winners so far in 2025.

Look no further than Nvidia (NVDA), which saw its sales and profits surge as tech companies threw billions at its advanced chips.

The demand for its Blackwell series alone generated a staggering $11 billion in revenue last quarter. But with its valuation soaring, NVDA is no longer the under-the-radar opportunity it once was.

While Nvidia's dominance is undeniable, the real money in AI isn’t just in chips—it’s in the infrastructure that keeps the entire ecosystem running.

And that’s where Celestica (CLS) comes in. While most investors were fixated on Nvidia, CLS quietly delivered massive gains, positioning itself as a crucial player in AI’s supply chain.

Celestica makes the electronic guts that keep AI data centers running. It’s not as flashy as ChatGPT or robotics breakthroughs, but the companies that build and maintain AI infrastructure are often where the real money is made. It’s the same reason drone component suppliers have been making a fortune while the spotlight stays on the drones themselves.

And the numbers back it up. Celestica reported $2.55 billion in Q4 revenue, an adjusted EPS of $1.11, and a forecast of $10.7 billion in revenue for 2025—a 22% earnings growth rate in a market where consistent growth is getting harder to find.

Yet its valuation remains reasonable, with a PEG ratio of 0.8, meaning investors are paying less per unit of growth compared to sector averages.

In 2025, market volatility has been brutal. Geopolitical tensions, persistent inflation, and Donald Trump’s new tariffs on China helped fuel a 5% Nasdaq drop last week, sending investors into panic mode.

But CLS kept climbing. Over the last three months, while the broader market wobbled, Celestica delivered a nearly 29% gain.

Even better, nine analysts have revised their earnings estimates upward in the last 90 days, with zero downward revisions. That’s the kind of confirmation bias I can get behind.

It’s a strategy I’ve seen pay off before. My former client reinvested in engineering instead of selling out early, betting on long-term value over a quick exit.

Celestica has been following a similar playbook—focusing on becoming an indispensable part of the AI infrastructure rather than competing with the companies making headlines.

While others chase the next big AI breakthrough, Celestica is already supplying the backbone that powers them all.

It currently ranks as the top electronic manufacturing services stock and is among the top 10 technology stocks overall—solid proof to its growing influence in the industry.

And with hyperscaler demand accelerating and AI adoption still in its early innings, Celestica is positioned to become even more critical to the AI revolution in the coming years.

So, where is the next 10-bagger in AI? It's probably not limited to the household names that dominate the headlines.

As I've seen time and again throughout my career, sometimes the most profitable investments are found in the companies building the essential tools for the gold rush, not the miners themselves.

And just like my drone-building client who turned personalized investment advice into a $40 million business by avoiding the quick exit, the real winners in AI will be those who recognize the opportunities hiding in plain sight.

After all, fortunes aren’t made by chasing shiny objects—they’re made by supplying the circuit boards that keep them running.

Trade Alert - (SH) March 5, 2025 - BUY

Trade Alert

When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more

March 5, 2025

Jacque's Post

(EUROPE FORMS A COALITION WHILE TRUMP WAGES WAR WITH TARIFFS)

March 5, 2025

Hello everyone

GEOPOLITICS CORNER

President Zelensky meets the King at Sandringham in the U.K.

EUROPE TAKES THE REINS

British Prime Minister Keir Starmer says the UK, France, and Ukraine will devise a peace plan to end the conflict. Many European nations have vowed to join a coalition willing to help Ukraine. Member states also promised to continue supplying arms to Ukraine during the war and to provide military equipment afterward to ensure the country can defend itself in the event of further Russian aggression.

European Commission president Ursula von der Leyen said she planned to inform EU member states of her plans to strengthen the continent’s defence industry and military capabilities.

The European Commission president has stated that “lasting peace can only be built on strength, and strength begins with strengthening ourselves.”

Following the crisis summit on Sunday, French President Emmanuel Macron said that France and Britain were proposing a one-month truce in Ukraine “in the air, at sea and on energy infrastructure”, although not, initially at least, covering ground fighting.

Even our Australian Prime Minister, Anthony Albanese, has stated that he is open to Australian troops joining a Ukrainian peacekeeping coalition.

Mr Zelensky told journalists shortly before departing Britain that “it will be a failure for everyone if Ukraine is forced into a ceasefire without serious security guarantees.”

TARIFF TRADE WAR

The Trump tariffs will create victims across the world if he continues to escalate the trade war with China.

Mark Carney, the Bank of England’s governor, has warned that a trade war could cut US growth by as much as five percent, twice that of the rest of the world. But Trump does not seem to care about the disproportionate damage that the tariffs are expected to do to the US or that there could be severe unforeseen consequences.

Trump’s electoral success was partially a result of his “America First” rhetoric: Sticking up for the workers who lost their jobs when industries such as manufacturing or mining either moved abroad or became obsolete.

Globalization hasn’t been fair: it has delivered prosperity to an increasingly small few rather than to everybody. But tariffs on imports will mean higher prices for everybody, consumers and businesses alike.

The International Monetary Fund (IMF) stated on Monday that if Trump escalates the trade war with China, the US will be “especially vulnerable.” Americans will lose jobs and have to pay more for items ranging from food to electronics, and international businesses that have positioned themselves as vital cogs in the global supply will be put at risk.

To pursue policies that hurt communities that have already suffered is simply perverse. Everyone gets hurt in trade wars, but ordinary citizens get hurt more than most.

Today, China has retaliated with additional tariffs of up to 15% on some U.S. goods, from March 10.

Canada has also fired back with potential tariffs on US imports. The Canadian Prime Minister, Trudeau, has indicated that should American tariffs come into effect on Tuesday, Canada will, effective 12.01 a.m. EST tomorrow, respond with 25 percent tariffs against $155 billion of American goods. In addition, Trudeau stated that there would be a discussion with the provinces and territories to pursue several non-tariff measures.

I wonder if Mr Trump considered how these sweeping levies will affect supply chains for key sectors like cars and construction materials. Supply chains could be effectively choked, risking a hike in consumer prices.

This fact could indeed mess with Mr Trump’s effort to fulfil his campaign promises of lowering the cost of living for households.

It’s also recently come to light that tariffs on agricultural imports would come into effect on April 2.

While U.S. stocks declined yesterday, Europe’s defence stocks surged in the wake of renewed talks over the fate of the Russia Ukraine war, with BAE Systems, Thales, and Rheinmetall rallying as leaders met for crisis talks about the conflict.

QI CORNER

SOMETHING TO THINK ABOUT

Cheers

Jacquie

Trade Alert - (AMZN) March 5, 2025 - BUY

Tech Alert

When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more

Trade Alert - (JPM) March 5, 2025 - STOP LOSS - SELL

Trade Alert

When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more

March 5, 2025

Diary, Newsletter, Summary

Global Market Comments
March 5, 2025
Fiat Lux

Featured Trade:

(I HAVE A NEW OPENING FOR THE MAD HEDGE FUND TRADER CONCIERGE SERVICE),
(TESTIMONIAL)

I Have a New Opening for the Mad Hedge Fund Trader Concierge Service

Diary, Newsletter

Our latest performance run for the ages has delivered unintended consequences once again.

One of my Concierge clients bought the bottom of the recent banking crisis crash to load the boat with bank stocks.

As a result, he never has to work again, not bad for someone who is only 45. No need for a Mad Hedge Concierge Service here.

I seem to have a recurring problem.

People make so much money from my concierge service that they retire early, and I never hear from them again.

No surprise with my trailing one year performance now at an eye-popping +81.87%.

That means I have a new opening for the Mad Hedge Concierge Service. I limit the service to only ten clients at any one time, and entry is by application only.

The goal is to provide high-net-worth individuals with the extra degree of assistance they may require in managing diversified portfolios. Tax, political, and economic issues will all be covered.

It is also the ideal service for the small and medium-sized hedge fund that lacks the resources to support its own in-house global strategist full-time.

The service includes the following:

1) Emergency access to John Thomas 24/7 through his personal cell phone number so he can act as your investment 911.

2) A risk analysis of your own personal portfolio with the goal of focusing your investment in the highest return sectors for the long term.

3) A monthly phone call from John Thomas to update you on the current state of play in the global financial markets.

4) Personal meetings with John Thomas anywhere in the world once a year to continue our in-depth discussions.

5) Early releases of strategy letters and urgent trading information.

6) More detailed and early recommendations on LEAPS or two-year call options on the best high-growth names.

7) Access to a dedicated Concierge website listing complete with All LEAPS investment portfolios.

The cost for this highly personalized, bespoke service is $12,000 a year.

To best take advantage of my Mad Hedge Fund Trader Concierge Service, you should possess the following:

1) Be an existing subscriber to the Mad Hedge Fund Trader, who is already well aware of our strengths and limitations.

2) Have a liquid net worth of over $250,000.

3) Possess a degree of knowledge and sophistication of financial markets. This is NOT for beginners.

To subscribe to Mad Hedge Fund Trader Concierge Service, please email Filomena at customer support at support@madhedgefundtrader.com. Please put “Concierge Candidate” in the subject line.

I look forward to hearing from you.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

Testimonial

Diary, Newsletter, Testimonials

It’s been great working with you over the past year. You certainly pick the right timing with many clients reporting 100% returns or better over the past 12 months. I never would have found the US Steel trade without you. Attached please find my wire for $12,000 for my Mad Hedge Concierge renewal.

Terry
New York City

March 5, 2025 - Quote of the Day

Diary, Newsletter, Quote of the Day

"Going to weddings and funerals is part of being a financial advisor," said Theresa Chacopulos of Wells Fargo Private Banking, the top-producing financial advisor in Arizona.