Here we are, in the second week of the government shutdown, and the markets remain remarkably complacent. The major averages keep leaning on major technical support levels: the Dow Jones Industrial Average is under the 15,000 mark while the S&P 500 has been bouncing on its 50-day moving average.
But as the shutdown continues with no compromise deal between House Republicans and President Barack Obama in sight, we inch closer to the much more serious debt ceiling deadline on Oct. 17. If we hit that, the stakes are immediately raised. We’re not just going to be worried about closed war memorials, but the potential for a debt default, credit rating downgrades and market turmoil on a scale not seen since August 2011 — the last time Republicans and Democrats locked horns over this issue.
In preparation, the sellers are starting to assert themselves, which is creating opportunities on the short side for the first time in months. Here are three stocks to short that I have recommended to my clients:
Click to Enlarge Tech heavyweight Hewlett-Packard (HPQ) continues to struggle with its turnaround amid a stagnant PC market and stillborn attempts to diversify into tablets and cellphones. UBS recently cut its price target on the stock, expecting lower earnings guidance out of HPQ’s Oct. 9 analyst meeting.
As the turnaround gets tougher, CEO Meg Whitman is backing off of revenue growth prospects for 2014 and notes that recent management changes will take time to have a positive impact.
For now, HPQ shares are looking vulnerable as they melt below their 200-day moving average.
Click to Enlarge Despite all that’s happening in the market right now, the yen carry trade remains a dominant force. Hedge funds continue to maintain very large short yen positions, accumulated during the past year as the new government in Tokyo actively weakened the yen to restore their economy via increased export competitiveness. And for a while, that boosted Japanese stocks in a big way.
But now, as the U.S. government succumbs to political dysfunction, the yen’s traditional role as a safe-haven currency is making a comeback. As a result, the yen is threatening to push up and out of a multimonth consolidation pattern going back to April. If so, those hedge funds will be forced to scramble to close their yen carry trades, magnifying the move.
That’s a negative for yen-sensitive Japanese exporters like Sony (SNE), which is collapsing out of a topping pattern going back to May as it falls below its 50-day moving average — a technical support level SNE used throughout September.
Click to Enlarge The longer the U.S. government shutdown continues, the more painful the drag on Q4 GDP growth will be. According to Bank of America Merrill Lynch, a one-month shutdown would be enough to result in an outright contraction in the economy.
That’s bad news for economically sensitive materials stocks like Cemex (CX), which is drifting lower after forming a double-top pattern in May and August. Shares are threatening to fall through their 200-day moving average and return to their June lows — which would be worth roughly a 16% gain to shorts from here.
I’ve added all three to my Edge Letter Sample Portfolio as short possibilities.
Anthony Mirhaydari has recommended short positions in CX, SNE and HPQ to his clients.