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Monthly Archives: December 2009

It seems to me that given the current economic conditions, shorting indexes like the Russel 2000 can prove a wise move. Here is the chart for the highly liquid etf IWM for the past 6 months.

IWM etf 6 month chart

With views like these:

“Employment won’t come back because the unvarying source of employment recovery — small business — is flat on its back. The credit crunch for small business (with bankruptcies up 44% year on year) keeps getting worse”, David Goldman.

Take a look at the following chart showing lending by major banks:

bank lending
Further, consider the following:

“The health care bill (as Goldman Sachs observes) will put onerous requirements on the two out of five small businesses that do not presently have a health care plan and thus discourage future hiring”. Source.

Indeed, it seems quite reasonable to short the Russell 2000 in the event of a slight overall market correction, which is likely for various reasons including the following: consumer spending, downward revision of GDP, talk of ending the stimulus, unemployment…

Shorting the Russell 2000 has seldom been easier. To do so, it is only necessary to buy shares in the inverse etf TWM (Ultra Short Russell 2000). Six month chart here:

A good play might be waiting till January of 2010 is upon us, and if signs emerge showing that IWM has failed to hold above $62, buying TWM and monitoring the movement of IWM. It is quite possible that IWM could fall to near $56, a low it made in early Nov of 2009. In such an event, TWM is likely to trade from around $26 to around $34, roughly a 20% gain. This play should be watched carefully and treated with proper stops, should it be necessary to exit promptly; fortunately, the leveraged etf TWM is highly liquid also.