No Love For S&P 500 Shorts, But Gold & Silver Stocks Look Interesting Again!

Just a quick note this evening.

Despite a modest down day for U.S. Stocks today, on balance, short sellers have to be nervous given the intra-day price action yesterday and today. I personally thought that Monday's slide was the beginning of an extended downturn, but buyers seem willing to step in despite a potentially negative shift in U.S. monetary policy before year-end. While the bearish case for stocks still looks compelling to me, timing is everything, and maybe the bulls still have some ammunition for additional upside fireworks.

In the interest of full disclosure, I exited my entire short position in the S&P 500 today.

Also in the interest of full disclosure, I re-entered the precious metals arena today with long positions in several North American gold and silver stocks, plus the GDX and GDXJ gold mining ETFs.

With an interest rate hike from the Federal Reserve on the near-term horizon, why would anyone want to own gold and silver stocks? I've been asking myself this question several times over the last couple days. I could say that both gold and silver are now "oversold" technically and due for a bounce. This is true, of course, but it's not a good enough reason to buy here. All I really have that's different from everyone else is my computer trading system. While the signals from my system have been less than perfect in the precious metals arena, they have mostly provided me with enough successful trades that I am compelled to take action when buy or sell signals are actually triggered.

A bunch of daily chart buy signals have been triggered this week in this most hated stock group. Here is the latest daily chart of the most popular Gold Stock Mining ETF (symbol GDX):

Major Gold Mining Stocks ETF (GDX) Daily Chart with Computer-generated Buy & Sell Signals

Daily Chart Sell Signals in SPX, NDX, and DJIA at Friday's Close

Daily chart sell signals were triggered by my computer trading system in the S&P 500 Index (SPX), the S&P 500 ETF (SPY), the Nasdaq-100 Index (NDX), the Dow Jones Industrial Average (INDU), and the Dow Jones Industrials ETF (DIA) at Friday's close, October 30th.

In the interest of full disclosure, I have now allocated 50% of my assets under management to a short position in the S&P 500 Index. The remaining 50% has been allocated to "Cash" and a modest long position in medium-term blue chip corporate bonds.

The price action in U.S. stocks following last Wednesday's FOMC announcement was nothing short of incredible. I've seen many short squeezes in my career as a trader, but Wednesday's last hour rally was clearly one of the strongest given the relatively hawkish news from the Federal Reserve (a December rate hike is definitely still on the table, according to Fed officials). Of course, in my view, there is NO CHANCE now of an interest rate hike from the Fed this year. Now it's just a question of whether or not there will be a hike next year!

If the Fed doesn't hike interest rates any time soon, isn't that bullish for U.S. stocks? At this point in the economic cycle (i.e. almost 80 months into an economic recovery), maybe the Fed will soon have to find a way to EASE monetary policy to fight the next recession, which I think is on the near term horizon. If the Fed actually eases monetary policy (with negative interest rates or another QE program), won't that be bullish for stocks? I guess everything depends upon how deep the next recession is and to what extent corporate earnings will suffer. Since I am bearish on U.S. stocks in general and short the S&P 500 Index specifically (without a hedge), then I clearly think the economic negatives immediately ahead will outweigh anything the Fed can do, at least temporarily.

My greatest fear as a short-seller is the potential increase in central bank purchases of U.S. stocks. I strongly suspect that central banks in Japan, China, and Switzerland already have significant positions in global equity shares (including U.S. stocks) on their balance sheets. And Mario Draghi has said that all assets, except gold, are being considered for purchase in the ECB's current and ongoing quantitative easing program. I guess the $64,000 question has to be now: "Are central banks omnipotent?" So far in this 6 1/2 year recovery, the answer has been mostly yes! With my current short position in the SPX, I obviously think that the "intimidation" factor of central bank omnipotence will be severely tested over the next several months!

S&P 500 Index Daily Chart with Computer-generated Buy & Sell Signals