Shorting the S&P 500 at 4,262
Equities are frothy at these levels, can we make money on a reversal?
I’m shorting the S&P 500. The risk reward at this juncture strikes me as appealing. We’ve retraced so far that we’re only about a 12% rally from the all time high. I’ll set my stop slightly below that level, so if the markets go up to 4,600 I’ll get out of the trade.
There are several ways to lay on this trade but after some research I’ve decided the best option is buying SH, an inverse SPX ETF. There is some wonkiness in how this ETF behaves. It’s designed to inversely match SPX performance over the course of a single trading day, but after that all bets are off. I won’t go into the details because, frankly, I don’t really understand what’s going on under the hood. What I am aware of is that I need to track the position closely, and I can’t expect perfect performance.
I’ll put about 3% of my assets into this short. Depending on market conditions and timing, I’ll look to close out the position somewhere around 3,800 to 3,600. Or, if the trade fails, I’ll get stopped out at 4,600.
I found these to be the two best articles explaining the mechanics and risks of SH.