The indices are rising each day. Almost without pause. Those who opened long positions either in early May or at the start of the year are in a good spot. But is it really that bad for those who are short?
The question seems odd. Of course it's bad! But, in reality, things are more nuanced than that.
Surely, it's unfortunate for those who, a month ago, put all their money, or borrowed money, into short funds like SPXU or SQQQ.
However, those who perceive fundamental economic issues as a threat to the stock market, yet who still have a basic understanding of risk management, may view the current euphoria as an opportunity to sell higher.
The issues themselves, including rising interest rates, problems in the banking sector and commercial real estate, and a cooling labor market, have been widely discussed. It's not worth rehashing them here. After all, the technical aspect is more important.
A short seller believes that, fundamentally, the indices should be lower. But do they accept the reality that the market may not start to fall immediately upon the opening of the first shorts?
Undoubtedly. The market rises over 80% of the time. However, this fact itself is not a reason to momentarily go long and then attempt to quickly flip at the peak. Timing is a tricky thing.
What's far more important is understanding what to do in the event of one scenario or another. If one cautiously opens a position in small portions, then there's no significant issue with a “paper” loss.
Moreover, unfavorable movement at the start allows for a gradual increase in the position volume at a more favorable price. When the market does turn, such averaging will result in earning more than if the market had immediately collapsed following the opening of a small initial short position.
What matters here is that there is movement. Whether it goes down immediately or rises first isn't as crucial. Sometimes, it's even better if it rises first.
To conclude, given the present circumstances and despite the seeming adversity, I find myself quite comfortable holding SPXU.
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