Jump on the ‘Throw in the Towel’ Trade

Recommendation: Buy SDS

Ever since traders turned from who would win the White House to how the president and Congress would resolve the “fiscal cliff,” there’s been a decided move toward removing risk and locking in gains. Basically, the longs are throwing in the towel—and there’s a great opportunity for short-term traders to take advantage of that trend via one exchange-traded fund (ETF) designed to deliver twice the inverse of the S&P 500.

Wednesday, Nov. 14 trade was typical of what we’ve seen of late, with stocks initially seeing some upside only to turn volatile midway through the session, and then close near the lows of the day. When the final tally was taken, the S&P 500 was down another 1.4%.

One NYSE floor trader friend of mine from my Morgan Stanley days told me that President Obama’s press conference accelerated the selling, as the president made clear that he wouldn’t budge on the concept of more revenue via higher taxes on the rich. But this trader also told me that what the president said really wasn’t anything new. The real worry now, he said, is that the posturing on the fiscal cliff issue will make any significant deal even harder to reach.

Whatever happens with the fate of the debt and budget negotiations, the reality right now, as my friend put it, is that the longs are removing risk to preserve what’s left of their 2012 gains. This kind of selling tends to feed on itself, as none of the pros want to see a Q4 pullback in stocks morph into negative performance for the year.

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So, given that this “throwing in the towel” trade is still very much alive and well, short-term traders can take advantage of it, and it’s quite easy to do so.

That fund is the ProShares UltraShort S&P 500 (NYSE:SDS). The chart here shows the surge in this 2-beta leveraged fund, and since late October, a buying spree that’s taken the fund up through its 50-day moving average and right up to its 200-day moving average.

Based on the current trading color in the market, and the fear of the fiscal cliff, and the desire to lock in gains, I think it’s time for smart traders to jump on this “throwing in the towel” trade now. Just one word of caution though, SDS should be used as a short-term trading vehicle only. If there is any deal on the fiscal cliff, or if stocks begin to see buyers come back, that will be your cue to exit this trade. Until then, however, look for SDS to keep delivering some powerful upside.

Recommendation: Buy SDS

At the time of publication, Jim Woods did not hold a position in any of the stocks mentioned here.

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