Global Market Comments
April 17, 2025
Fiat Lux
Featured Trade:
(THE MAD HEDGE TRADERS & INVESTORS SUMMIT REPLAYS ARE UP)
(APRIL 16 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (SH), (SDS), (TLT), (MSTR), (GLD),
(GOLD), (SLV), (AGQ), (NEM)
Tag Archive for: (SDS)
Below, please find subscribers’ Q&A for the April 16 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, NV.
Q: Is it time to get out of the (SH), which is the short S&P 500 LEAPS?
A: I would say no. We're still very deep in the money for the LEAPS I put out two months ago. I doubt we're going to new highs by August when that LEAPS expires, so I would hang on to it, especially if you have other longs on the stock market. But if you're nervous, you probably have at least a 50% profit in that anyway, so take the money and run.
Q: Could the S&P 500 trade down to 4,500?
A: Absolutely, yes. China is kind of in a good position. They can wait. They can wait a very long time until they get what they want. We can't. Trump needs China to fold immediately, or the trade with China will cause a never-ending recession in the US. Remember, we have elections here—in China, they don't. That puts them in a very strong negotiating position. That's why you're seeing basically all economic data roll over and point to a recession. Even if some settlement is negotiated, there still will be some tariffs left. They just won't be at 145%. You know, it’s not a great investment environment to bet your retirement savings on, and certainly not an environment to engage in very rapid short-term trading unless you have 50 years of experience like I do. That's why I'm up this month, and the rest of the world is getting absolutely crushed.
Q: Are you going to send more LEAPS?
A: LEAPS are something we do at market bottoms, not tops, because we have such enormous leverage in the LEAPS trade—they’re usually 10 - 1 to 100 - 1 leverage. At some point, there'll be a lot of fantastic LEAPS in technology stocks, but I don't think we've hit bottom yet. In fact, at best, they've mounted weak bounces over the last few days. So, the charts still look terrible—not a good time for LEAPS.
Q: When do you see the bottom?
A: I have no idea, nobody has any idea. It's like economic policy is changing hour by the hour. Best thing to do is nothing in that situation—and that's what most of the economy is doing. That's why the economy is shutting down. Nobody knows what the final picture will look like—the uncertainty is the greatest since the uncertainty of the pandemic, or 9/11 before that.
Q: Should I hide in a money market fund?
A: No, with the money market fund, you run credit risk with the issuer of that fund. With 90-day US Treasury bills, there's no risk, so you have a government guarantee to get all your money back on the maturity date. If your custodian goes bankrupt, you can always get the T-bills back. It may take you three years in custodian bankruptcy proceedings to get your money market fund back. That’s what we saw with MF Global in 2011.
Q: What is the end game of the China-US trade dispute? How does it affect the stock market?
A: Well, we can't see an end game. Basically, you have two counterparties who are stubborn as heck, and we could be stuck in no man's land for a very long time. You'd have to think eventually a settlement of some type comes. Is that worth a recession for the U.S? For most people, I doubt it. And what if China just wants to wait out Trump and wait for the tariffs to go away in four years? That is a possible outcome. Stock markets always discount the worst-case scenario first before they discount anything else. I think that's what we saw last week, when we broke 5,000 in the S&P 500.
Q: Are you optimistic about bank stocks now?
A: No. They will lead the downturn along with technology stocks. But when this all ends, they will also lead the upturn, and that's why you're seeing bank stocks have such hard bounces off their bottom. It's another one of two sectors that people will be first to rush into—banks and technology stocks. And while tech is expensive, banks are cheap.
Q: How can interest rates fall when government policies, interest rate policies, are causing them to spike?
A: Well, it's very simple: when foreign investors lose faith in the U.S. Government, they have, they pull their money out. They don't need to be here. It's a situation of, “Well, if you don't need us, we don't need you.” And foreigners own about 25% of all of the $36 trillion in national debt out there, or about $9 trillion. And in stocks they own here and the number goes up to $12 trillion. It doesn't take much selling to cause a panic in the bond market. That is what we have been seeing. Whether that continues, I have no idea—it depends on the next tweet coming out of Washington.
Q: What about Bank of America (BAC)?
A: Yeah, it will also bounce the hardest off the bottom—great buy, and these things are all cheap relative to technology stocks. You know, banks still have PE multiples in the low teens. Tech stocks are all the way down to the low 20s from the 30s and 40s, so they're roughly trading at double the multiples of bank stocks. That's one reason people are rushing back into these.
Q: What's the basis of your prediction on a falling US dollar?
A: Again, it's foreign selling. I don't think I've ever seen a falling dollar and rising interest rates in 60 years of watching. It goes against all economic fundamentals in the currency markets. But when there's a panic, there's a panic. People want out of everything at any price, and that's what's happening now. As long as foreigners are dumping our assets, the dollar will keep going down—dumping our assets means dollar selling after 80 years of dollar buying.
Q: Is gold the only safe haven?
A: Yes. We'll get into this in the gold section, but even gold went down for three days, and then wiser heads prevailed and it actually triggered a panic melt-up in gold assets. The miners were up 25% in days. That is another great weak-dollar play.
Q: How do you protect the US from a dollar fall?
A: Change our economic policies; end the trade war.
Q: Is it a good time to buy a house?
A: No, it is not, unless you can wait out the current downturn. High interest rate mortgage rates shot up from 6.5% to 7.1% in a week, and that basically kills off the housing market for the foreseeable future. And of course, when people are worried about their futures, their savings, and their assets, the last thing they do is go out and buy a house.
Q: Is there enough negative sentiment around now for us to go back into the bond market?
A: No. There is no precedent for the type of market action that's going on now. Will the U.S. government suddenly become reasonable? I doubt it. You can expect tweet bombs to happen at any time. So, people are just hoarding cash and avoiding risk at all costs. It used to be that bonds were the safe place to go. No longer. Not with 10% moves down in a week like we saw last week. Sorry—T-Bills are the only actual safe play out there, and their yield is the same as Treasury bonds without the risk.
Q: Will crypto keep going down?
A: If we continue with a risk-off market, I think you can expect crypto to keep falling. Crypto fell 30% from its top—at least Bitcoin did. It's basically matching the downside with tech stocks one for one, so no protection in crypto, no diversification. The protection aspect that was promised by crypto promoters lever shows. No flight to safety is happening there whatsoever. And that's why I'm looking to add to my short in MicroStrategy Inc. (MSTR)—they're a leveraged long Bitcoin play.
Q: Is the U.S. economy set for a hard landing?
A: I think absolutely, yes, the hard landing is in progress. That's what all of the economic data says. It's hard to find any positive news coming out of the economy—people are running for their lives, essentially.
Q: Do you expect inflation to return and take stocks lower?
A: Absolutely, yes. The highest tariffs in history start hitting retail prices in the next month or two, and the price increases should be dramatic, especially on anything from China. So yeah, we should see that come out in the data in the next few months.
Q: Do you expect silver to follow gold?
A: Yes, I do, but it hasn't been performing as well because there is a recession drag on silver, which you don't have for gold. Silver (SLV), (AGQ) are used in a lot of electronics and solar panels.
Q: When do you get back into gold (GLD)?
A: Whenever we get a dip. So far, any dips have been very brief and short-term. It's kind of reminiscent of the 1970s when gold moved from $32 an ounce to $900. That’s when you found me in a line in Johannesburg, South Africa, waiting to sell all my Krugerrands.
Q: Which countries will benefit from manufacturing moving out of China?
A: The answer is really no countries. As soon as manufacturing moves from China to another one like Vietnam, the US then puts punitive tariffs on that second country. So, there's no place to hide. It's really a war against the world. That's the message that the administration is putting out: if you don't want to build a factory here, we don't want to do business with you. We don't want your products. And most companies will do nothing. They'll wait this out, wait for a future president to eliminate all tariffs. Until then, international trade grinds to a halt. No trade makes sense at 145% tariff. Just to give you some idea on how much that is, if you buy a top end MacBook Pro for $8,000, and you pay the full 145% tariff, that is an $11,600 tariff if you have to pay it, which brings the total cost of a MacBook Pro to nearly $19,600. How many are you going to buy at that price?
Q: Do you think the Fed will cut interest rates?
A: No, we haven't seen the inflation data yet. They are backward-looking, and only after we see a sharp rise in prices will they raise rates. Chances of them cutting now are zero with all the risks in inflation to the upside right now and unemployment still under control. So, no interest rate cuts this year.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 8, 2025
Fiat Lux
Featured Trade:
(A REFRESHER COURSE AT SHORT SELLING SCHOOL),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL), (TSLA),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)
I’m not necessarily advocating a short sale here after markets have lost a staggering $10 trillion in market cap, from $50 trillion down to $40 trillion.
But a single tweet could trigger a 5% rip-your-face-off rally at any time and only then can you have another shot at betting the market will continue its downtrend.
So I am going to review my short-selling school once again so you can witness the spectacular performance that all of these short plays have delivered.
Some asset classes are reflecting the fact that we are already in a full-blown recession, while others are not. In case 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.
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 points 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.
Virtual 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 allow 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 read 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 stocks 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 risks 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 a short 1 September 2025 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 rise, then you have a big problem, and the losses can prove ruinous.
However, 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 it 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 by 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,” and 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 a 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
Global Market Comments
March 21, 2025
Fiat Lux
Featured Trade:
(THE MAD HEDGE MARCH TRADERS & INVESTORS SUMMIT REPLAYS ARE UP)
(MARCH 19 BIWEEKLY STRATEGY WEBINAR Q&A),
(SH), (SDS), (COST), (PANW), (FTNT), (ZS), (MSFT), (GOOGL), (NVDA), (GLD), (AMZN), (BAIDU), (BABA), (LNG), (FXA), (FXE), (FXC), (FXB)
Below please find subscribers’ Q&A for the March 19 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, NV.
Q: I tried to get into ProShares Short S&P500 (SH), it seems pretty illiquid. How did you get in?
A: Well, before I actually sent out the trade alert, I tested the liquidity of the SH seeing if you could get anything done. This is an easy thing to buy on up days in the market when others are taking profits. It is a really difficult thing to get into on down days in the market because you have so many long-only mutual funds trying to hedge their exposure through buying the (SH). We literally had just one up day at the beginning of the month, and I was able to increase my position tenfold and had no trouble getting my price on the LEAPS at $0.50. If you waited one day, you would have had to pay $0.60 for the same position, and that’s because the volatility explodes on this thing. If you look at the charts, the 1x short play has actually delivered enormous returns, as well as the 2x. It’s outperforming 2 to 1. So you have to buy when other people are selling, that’s the only way to get in and out of the (SH). Of course, I’m buying these things with the intention of running these to expiration.
Q: Is it time to sell US stocks?
A: Yes but only on the up days like today. Don’t sell into a pit, don’t sell into bottoms—wait for rally days like today. That's a good place to reduce risk and add some short positions like the ProShares Short S&P500 (SH) and the ProShares UltraShort S&P500 (SDS).
Q: How did you miss the rotation to Europe and China in emerging markets?
A: Very simple—if you ignore something for 15 years, it’s easy to miss a turn. I also missed the turn in Japan, which I ignored for 35 years. The real reason though is that I underestimated the extremity of this government, its economic policies, and the chaos it would create. I think almost everyone underestimated what the new government would actually do and how it would affect the stock market. If I knew ahead of time that the government would adopt recessionary policies, I would have done everything to get my money out of the US and into Europe and China, but this kind of unfolded with a shock a day, sometimes a shock an hour, and markets don’t like shocks and surprises, so they sold off. The more a stock had gone up in the last six months, the more it went down when the new government came into office.
Q: What are your downside targets for the market?
A: Now that we are in recession, I think any 5% rally off the recent low at 5500, you want to sell. The market could rally 3-5% off the bottom—that would be half of the recent loss. Then you’d want to get rid of more longs, cut your portfolio down to a few very high-quality positions, and add downside protection by buying the ProShares Short S&P500 (SH), the ProShares UltraShort S&P500 (SDS), doing buy rights on the calls and buying outright puts. That would be my recommendation. Eventually I see the S&P 500 falling to 5,000 by the summer, and if I’m wrong, it’s going down 30% to 4,500. That is a deep recession scenario, which we are on the track for unless the government suddenly reverses its draconian policies. This is the most extreme government in American history.
Q: Are you going to use the selloff to get into Costco (COST) after a 20% selloff?
A: Absolutely. I’ve been trying to get into Costco for years and it’s just always been too expensive. They keep increasing earnings every year —investors are willing to pay very high multiples for that. This time around, I am going to get into Costco because they are an absolutely outstanding company. By the way, my mentor at Morgan Stanley was a guy named Barton Biggs, who created the asset management division some 40 years ago. He was close friends with Sam Walton, the founder of Walmart, and Sam Walton was a huge admirer of Costco, which was just starting up then. I’m surprised they never took over the company, which is too big to take over now.
Q: What to buy at the bottom?
A: You want to buy what was leading right before we went into this collapse. Those are financials, and the highest quality profit making of the Mag7 which include Nvidia (NVDA), Amazon (AMZN), Alphabet (GOOGL), Meta (META), as well as cybersecurity stocks like Palo Alto Networks (PANW), Fortinet (FTNT), Zscaler (ZS) and so on.
Q: Why are you making your recession call when we have no evidence of that fact?
A: If you wait for proof of recession, that often is the market bottom. And that could be August of this year. You know, I talk to hundreds of businessmen around the world, and everyone is saying business is slowing. Companies stop making decisions. Customers stop buying. Everyone's afraid of the tariffs. Nobody knows what's going to happen next. Business confidence is terrible. That adds up to a recession, but data tends to move very slowly, so we won't see it in the data for months. If you're a stock trader, you don't have the luxury of waiting for confirmation of the data. By the time you get it, the move is over. But if you cut half of government spending or 12% of GDP, the recession outcome is guaranteed. It's not a speculation. That is the government's goal: to cause a recession, so they can have a recovery going into the next election to take credit for.
Q: If Alphabet (GOOGL) is broken up, what will happen to the company?
A: With all of these big tech breakups, the parts will be worth a lot more than the whole. The individual pieces can be sold off at much bigger premiums creating new companies with more stock liquidity. This is what happened with AT&T (T) in 1982. I participated in that, and the parts were worth more than the original AT&T was within two years. I expect that to happen to Alphabet, and I expect that to happen if Amazon (AMZN) is broken up— eventually, these companies become so big, they become too big to manage. And if the management sees they can get 100% premium on a spinoff, they'll take it so fast it makes your head spin.
Q: None of the 90% gain in stock prices during the Biden administration was a result of his policies.
A: That's absolutely correct. He stayed out of the way, which is the best thing that governments can do—get the hell out of the way. American capitalism on its own will innovate and create profits far faster than any other economic system in history. Biden did quite a good job of staying away.
Q: Why are credit spreads still okay to do in this environment?
A: Because the implied volatility on the options are so high, you can get insane amounts of money—in the money like 30% or 40% —and get trades done and have a 0% chance of taking a loss on that. Suddenly you're being paid double to take risks on these option trades. The classic example is the $88-$90 call spread in Nvidia (NVDA), which we have expiring on Friday, March 21. We never even got close to $90, but the implied volatility on the day we added that trade was a ridiculous 75%. So, it's almost impossible to lose money when you put on trades with implied volatility in the options of 75%.
Q: What's your long-term target on gold now that your last long-term target of 3,000 finally got hit?
A: Yes, we've been recommending gold (GLD) for seven years now. In that time, it's doubled: $1,500 to $3,000. I'm now looking for $5,000 in gold by 2030, in five years. I got a feeling that flight-to-safety plays are going to be very popular in the world going forward. And by the way, people who did look for Bitcoin to protect them in any downturns: Bitcoin actually went down three times faster than the S&P 500 in the last month.
Q: Will stocks rise if the Fed cuts interest rates?
A: No, they won't, because the only reason the Fed will cut interest rates is if inflation falls, and right now, inflation is about to see a big upturn as those import duties of 25% or 50% work their way through the system. A lot of companies are front-running price increases before they even pay the tariffs and try to carve out some extra margin for themselves in advance. On Wednesday, Jay Powell said he expects inflation to rise from 2.5% to 2.8% by yearend and this will prove to be a low number. That is his “president breathing down the back of his next” forecast.
Q: What are your favorite Chinese stocks?
A: Well, a lot of these leading stocks have already gone up 50% or more since the beginning of the year as capital flees the United States and goes abroad. But if you held a gun to my head and said you had to buy two, I would buy Baidu (BIDU), and I would buy Alibaba (BABA). Those would be my Chinese picks. Alibaba is the closest thing you get to an Amazon in China.
Q: Has the dollar hit its lows this year?
A: No. Risk of the next Fed rate move is an interest rate cut. That is going to hang over the dollar and the currency markets for the entire year. And I don't see any recovery in the dollar this year. In fact, it's easy to see much lower lows, and higher highs in the foreign currencies. Buy (FXA), (FXE), (FXC), and (FXB) on dips.
Q: How do you feel about natural gas?
A: I would not be a buyer here. I think we've had a terrific run off of extreme cold weather—believe me, we got some of that in Nevada too—and that is starting to fade now. This is historically when that gas starts to fade for the year. Long term, my view on gas is bullish because of increased exports to China. We have a very pro-energy administration here; that means taking off the export restraints on natural gas, which can only be good for the gas companies and the gas price. China has basically told us they'll take all the natural gas they can get from us because every shipload of gas they buy (LNG) means less coal they have to burn.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
March 6, 2025
Fiat Lux
Featured Trade:
(A REFRESHER COURSE AT SHORT SELLING SCHOOL),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL), (TSLA),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)
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
Global Market Comments
August 14, 2024
Fiat Lux
Featured Trade:
(A REFRESHER COURSE AT SHORT SELLING SCHOOL),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL), (TSLA),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)
Global Market Comments
May 23, 2023
Fiat Lux
Featured Trades:
(THURSDAY, JULY 6 NEW YORK STRATEGY LUNCHEON)
(SHORT SELLING SCHOOL 101),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)
CLICK HERE to download today's position sheet.