I was shorting the SPDR S&P 500 ETF (SPY) most of the day on Tuesday, adding to my already-large short position.
There are a number of factors that have contributed to my decision to go net short in a big way, including:
Narrow Market Leadership. We’re back to a market that’s basically led by the FAANGs — Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Google/Alphabet (GOOG) , (GOOGL) . Rising Short-Term Interest Rates. The 2-year U.S. note yield is up about 1.3 basis points at 2.39%. Complacency. I’m seeing more investor complacency — anecdotally, in the business media and elsewhere — ever since market’s main indices rallied off of their recent lows.
Gold. The rise in gold looks solid. I’m currently long the SPDR Gold Shares ETF (GLD) . Lackluster Banks. We’re seeing disappointing action in the financials. However, I continue to buy them. I’m long Bank of America (BAC) , Citigroup (C) , JPMorgan Chase (JPM) and Wells Fargo (WFC) , although I’m shorting Goldman Sachs (GS) .
Lastly, with S&P 500 closing at 2,706, the downside risk relative to the upside reward seems to argue in favor of maintaining a net-short exposure.
I’ve previously stated that I expect the S&P 500 to trade in a 2,200-2,850 range for 2018, with about 2,400 as fair-market value.
That means there are 506 points of downside risk to the low end of my S&P 500 range (2,200) and 306 points of risk to my fair value estimate of 2,400. However, I only see approximately 143 points of upside potential to the top of my predicted S&P 500 range (2,800). That’s not a good risk/reward ratio.
A version of this column originally appeared at 1:46 p.m. ET on Real Money Pro, our premium site for Wall Street professionals. Click here to get great columns like this from Doug Kass, Jim Cramer and other experts each trading day.