Well, it’s not what the bulls would want, but we are finally getting some excitement in the stock market again.
The Dow Jones Industrial Average just sliced below the 18,000 level for the first time since early May. A continuation of the recent surge in eurozone government bond yields pushed U.S. equity futures down sharply on Thursday morning — with the selling continuing into the cash session.
A number of catalysts are in play, from fractious Greek bailout negotiations to a stronger-than-expected eurozone inflation report on Tuesday and comments from European Central Bank chief Mario Draghi on Wednesday that recent bond market volatility was here to stay.
The IMF also cut its U.S. GDP growth forecast, and urged the Fed to delay its first rate hike until 2016.
It’s bad out there, folks. The 10-year German bond yield has already suffered its largest two-day rise since 1998 while the 30-year U.S. Treasury yield surged above 3.1% on Wednesday to return to levels not seen since early October. Big gains were also seen in Australian and Japanese bond yields.
The stock market just couldn’t ignore all this any longer, amid extended sentiment and breadth measures that had been narrowing for weeks.
For bearish traders, here are four ways to play a breakdown in the stock market.
Play the Breakdown: Short Crude Oil
One of my favorite plays at the moment is betting against crude oil ahead of Friday’s OPEC production decision.
Officials from Russia and Kuwait have admitted a production cut is basically off the table. This sets the stage for either an explicit or implicit production increase as Saudi Arabia, OPEC’s swing producer, aggressively increases drilling rig activity in recent weeks in an effort to renew the fight against U.S. shale producers.
The ProShares UltraShort Crude Oil (SCO) recommended to Edge subscribers is up more than 11% so far this month, and continues to be an attractive play.
Short Plays on Exxon Mobil (XOM)
A variation of the bearish oil theme is betting against the shares of oil majors such as Exxon Mobil (XOM), which dropped 1% on Thursday and returned to levels last seen in early April.
Companies like XOM have invested heavily in big, complex and expensive on- and offshore projects — many in turbulent parts of the world — that simply don’t work as long as oil prices continue to slip lower.
The Jun $87 XOM puts recommended to Edge Pro subscribers are up more than 98% since recommended on May 19.
Short Plays on Ford (F)
One of the hottest areas of the market exposed to consumers in this cycle has been automakers, with auto sales juiced by easy credit and the record rise of longer-term loans and larger loan balances.
But this simply isn’t sustainable without a clear turnaround in wage inflation. And even then, technological change such as automated vehicles and car sharing services suggest long-term demand for automobiles could be jeopardized.
No wonder that despite strong auto sales numbers being reported earlier in the week, Ford (F) shares are breaking down out of a long consolidation range just above their 200-day moving average going back to February. That has lifted the Jun $16 F puts recommended to Edge Pro subscribers to a gain of nearly 70% since recommended on May 8.
And there’s still room to go short on Ford stock from here.
Short Emerging Markets
While Europe, and specifically Greece, has been the center of attention, emerging-market stocks have been quietly slipping lower as shown in the chart of the iShares MSCI Emerging Markets ETF (EEM) above.
The EEM’s 200-day moving average has been low for the first time since early April on a stronger dollar (reduces the value of foreign investments) and signs of a cooling in global economic growth.
The unleveraged, inverse ProShares Short MSCI Emerging Markets (EUM) recommended to Edge subscribers at the end of May is up nearly 3% so far.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
