The election of Donald Trump sparked a stock market rally. His campaign promises were viewed as pro-business, pro-economy, and therefore pro-stocks. In a few short weeks, the Russell 2000 (the index against which I measure my personal performance), ripped to within a few percentage points of my top trend line.
As my readers know, when that happened, I automatically issue a “Yellow Alert”. In short, it’s a risk-reward/technical indicator. On the flip side, if fundamental vulnerabilities make it clear that a crash is coming, I issue a “Red Alert”. Thankfully, I haven’t needed to issue one of those since May of 2007 (before I started writing for Seeking Alpha).
Halfway between the Yellow and Red Alerts, I may issue an Orange Alert. As you can see in the Russell ETF (IWM) chart below, my last Orange Alert preceded the Russell’s sharpest 2-month decline since 2011. In contrast, my most recent Yellow Alert hasn’t exactly panned out — the Russell 2000 has failed to correct since that time. However, it has delivered its worst performance since the back half of 2015.
If you focus on short- and micro-cap stocks, it has probably been a challenging year.
Source: FreeStockCharts.com
Getting back to the Trump Administration, his presidency to date has proven that the Three Stages of a Winning Stock Pick can apply to the entire stock market. Indeed, investors thought President Trump was a “Great Find” that would lead to a “Gold Mine” for the markets. However, as is often the case, a “Wait Time” usually obstructs the path from Point A to Point B. That has clearly been the case for the Russell 2000.
In fact, the markets now hang at the precipice of the most threatening moment since the election. North Korea is a geopolitical hot button, terrorist attacks are abounding, and presidential CEO panels are disbanding. On top of it all, we have options expiration and it’s August, so we’re heading toward the worst month for historical stock market performance.
Looking again at the chart above, the IWM’s short-term support line is holding up. But it’s dangerously close to breaking down… and a move to the pre-election highs would represent a 12% decline.
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With options expiration and the weekend on tap, this could prove to be the most critical day of 2017.
In preparation, investors should either 1) initiate or increase their short positions as a hedge against a sudden market meltdown or 2) have a list of short positions/hedges ready, in case a meltdown begins.
I rarely discuss the details of my personal positions. However, considering the circumstances, I will submit that I am currently short Amber Road (AMBR), American Renal Associates (ARA), Criteo (CRTO), Caesarstone Ltd (CSTE), General Growth Properties (GGP), Hanesbrands (HBI), Harley Davidson (HOG), iShares Russell ETF (IWM), MGP Ingredients (MGPI), Radiant Logistics (RLGT), Signet Jewelers Limited (SIG), and UPS (UPS).
It should be noted that you don’t need to be an expert on short selling to find good shorts. In fact, found the vast majority of these short ideas right here on Seeking Alpha:
As you can see, it’s not so difficult to prepared for a market correction. If you’re a Seeking Alpha PRO subscriber, be sure to peruse their great Idea Filter for more short ideas. Readers seeking additional real-time updates and insight are also encouraged to click the Follow button on my profile here on Seeking Alpha.
Disclosure: I am/we are short AMBR ARA CRTO CSTE GGP HBI HOG IWM MGPI RLGT SIG UPS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information in this article is for informational and illustrative purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. The opinions expressed in Pipeline Data, LLC publications are the opinions of Mr. Gomes as of the date of publication, and are subject to change without notice and may not be updated. This content may also be published at PipelineDataLLC.com at a prior or later date. All investments carry the risk of loss and the investment strategies discussed by Mr. Gomes entail a high level of risk. Any person considering an investment should perform their own research and consult with an investment professional. Additional trading disclosures can be found in the Important Disclosures section at PipelineDataLLC.com.