I, Who Vowed to Never-Ever Short Stocks Again, Just Shorted the Entire Market

The setup is just too juicy.

By Wolf Richter for WOLF STREET.

In my decades of looking at the stock market, there has never been a better setup. Exuberance is pandemic and sky-high. And even after today’s dip, the S&P 500 is up nearly 29% for the year, and the Nasdaq 35%, despite lackluster growth in the global economy, where many of the S&P 500 companies are getting the majority of their revenues.

Mega-weight in the indices, Apple, is a good example: shares soared 84% in the year, though its revenues ticked up only 2%. This is not a growth story. This is an exuberance story where nothing that happens in reality – such as lacking revenue growth – matters, as we’re now told by enthusiastic crowds everywhere.

Until just a couple of months ago, the touts were out there touting negative interest rates soon to come to the US and thus making stocks the only place to be. Those touts have now been run over by reality. Now they’re touting QE4 by the Fed, or whatever. And people were looking for any reason to buy.

The unanimity of it all was astounding. I’ve seen this before, but not in this magnitude.

And there is this: As stocks were surging over the past few months, investors with large gains who wanted to sell didn’t sell before year-end in order to defer that income for tax considerations. So there was reduced selling pressure from that group that would have liked to sell, and that will sell after the new year starts.

So I shorted the stock market today, December 30 – me who is on record of saying repeatedly that I would never ever short anything ever again, after the debacle of November 1999 when I shorted the most obviously ridiculous Nasdaq high-fliers a few months too early. They collapsed to near-zero, but not before ripping off my face.

But I changed my mind. The setup is just too perfect. A year ago, on December 22, 2018, as stocks had been plunging, I wrote, Nothing Goes to Hell in a Straight Line, Not Even Stocks. That turned out to be true – practically nothing goes to hell in a straight line. I expected a bounce. I didn’t expect that the bounce would be this huge. But now it’s part of the setup for shorting the market.

  • I sold short the SPDR S&P 500 ETF Trust [SPY] the biggest and most liquid ETF tracking the S&P 500 index. It’s up nearly 29% in 2019, from already wildly overvalued levels a year ago, despite the drop it had gone through.
  • And I sold short the Nasdaq 100 Invesco QQQ ETF [QQQ], which tracks the NASDAQ 100, the largest most liquid tech-focused ETF. It’s up 42% in 2019.

I have spoken out against shorting because the risk-reward relationship is out of whack. If you short individual stocks, the maximum gain if the shares go to zero is 100%, while the maximum loss is theoretically unlimited and can easily exceed the entire value of the bet. And betting against stocks by buying put options leads most investors to pay the premium and watch those options expire worthless.

The only way you can short stocks and make money reliably is if you have a large megaphone that is closely followed by algos, traders, and the entire financial media. You quietly take your short position in a stock and then announce it, and algos and traders react, and the shares plunge. That’s the only reliable way to make shorting work.

My little website isn’t followed by algos and can’t move markets or stocks or anything else, and that’s a good thing. I can say whatever I want, and nothing big happens as a result of it.

Shorting is socially frowned upon. It’s like you’re willfully trying to destroy people’s constitutional right to the pursuit of happiness. Back in 2017, NYSE Group President Tom Farley, famously told Congress, “It feels kind of icky and un-American, betting against a company.”

But I still won’t short individual stocks because they can get too crazy – especially Tesla, one of the most obvious shorts with an enormous amount of short interest outstanding. This in itself is practically a guarantee the stock cannot crash because short sellers become buyers to take profits when the price drops enough, and they put a floor under the shares. And the massive short interest makes TSLA prone to violent short-covering rallies.

This stock is a prime example of how crazy the market is. In the US, there were fewer new vehicles sold in 2019 than in 2000. Similarly, in Europe and in Japan. Even formerly booming markets, such as China and India, have now hit the skids in auto sales. For growth, every automaker needs to take market share away from other automakers – a tough game in a no-growth environment.

Tesla’s revenues fell 7.3% year-over-year in the third quarter, a steeper decline than the revenue declines at other US automakers.

At $412 a share, Tesla is valued at $75 billion. This is over three times 12-month revenues ($24 billion).

GM is valued at $52 billion. This is just 0.36 times 12-month revenues ($144 billion). By this measure of the price-to-sales ratio, Tesla, if it ever becomes profitable on an annual basis, is overvalued by a factor of 10 compared to GM.

GM at this price is still a sell, in my view. As for Tesla, in the optimistic scenario that it makes an annual profit of $1 billion, it’s shares would have to drop to $41 before they’re on the same level of overvalued as GM, and both would still be a sell at those levels.

So Tesla at the current price is one of the most obvious shorts in history. But I wouldn’t short the shares because they’re just too crazy, and because the short is too obvious.

Given how eagerly investors are betting on a big plunge, deeply out-of-the-money Tesla put options carry a big premium. For example, one contract (representing 100 shares) that expires in January 2021, with a strike price of $290, which is about 32% below today’s share price, traded today at $2,625 — another sign that Tesla has become one of the most obvious shorts out there. And that takes it off the table for me.

In terms of my SPY and QQQ short positions: they’re trades, not a prediction of where the market will be a year from now. They represent my expectations that the market will drop enough to make this worthwhile over the next few months.

If this math is successful, and I cover those shorts with a gain, it doesn’t mean that I therefore turned bullish on the market. On the contrary. In the larger scheme of things, stocks would have to tank a whole bunch more before I’d take a buy-and-hold position in the overall market. Happy New Year!

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  334 comments for “I, Who Vowed to Never-Ever Short Stocks Again, Just Shorted the Entire Market

  1. grundy says:

    “Exuberance is pandemic and sky-high”

    Seems to me the most hated bull market in history. I guess it depends on where you look. How are you measuring exuberance?

  2. California Bob says:

    I dunno, Wolf; more giveaways to corporations means more stock buybacks–not increased investment like the CEOs promised, fingers crossed behind their backs–so share prices will likely rise:

    https://www.salon.com/2020/01/01/trump-administration-is-quietly-gutting-tax-law-to-give-big-new-breaks-to-corporations/

  3. Just don’t short the gold sector in this exploding money, negative real interest, falling dollar, rising commodity environment!

  4. shizz says:

    I sincerely hope that it pans out for you Wolf. You are one of the few honest people left in financial reporting. I also worry that because you are one of the handful of rational people left that perhaps you underestimate what is being done both overtly and covertly to keep the wheels on this thing.

    QE was started again without so much as a open debate about it. Over the past 20 years I am reminded of how many times I have heard from financial “experts” and online blowhards that “The Fed doesn’t do that!” Only to find out later that yes, they did in fact do that and to much worse of an extent than was even expected.

    Personally I think we have crossed the Rubicon of being able to say that something isn’t happening considering the absurdity of what has taken place over the past 20 years. Hell, the people with the good questions don’t get to ask them at the Fed market fluffing (I mean press events).

    I think you said it best so long as everyone believes that everyone believes… I think it’s becoming clearer by the day that that the vast majority of us don’t know what to believe and certainly won’t find out until months later when the Fed feels like letting the public in on their scrubbed meeting minutes.

    The only things I believe in anymore are things I can hold, touch or defend.

  5. van_down_by_river says:

    Ouch! Good luck with that, I’m afraid you’re going to need it.

    There is a reason the term “don’t fight the Fed” exists, but in this case you are fighting every major central bank around the world. I hope you come to your senses before you lose too much.

    Think in terms of wealth not money. If you shorted the SPY and QQQ what did you go long? Currency? That’s a dangerous move.

  6. Eric Brunelle says:

    Although I agree with Wolf on many things and value his articles, I disagree strongly with initiating a short position in a market so obviously manipulated and controlled by the 1% for the 1%. The stock market is Social Security for the rich, and is rigged to go up over time. It HAS to go up over time for our entire economy to work. Every pension plan, 401K, retirement account, city, state, and federal budgets, consumer confidence, and the core wealth of the 1%…ALL dependent on the ever increasing price of stocks. I’m sure at some point there will be a well choreographed decline that will be erased in short order. As we saw last December. Even after the Great Recession, where century old banks were going under, we attained the previous bubble highs a mere 4 years later. I would never advise anyone to short a market so completely manipulated to the upside by the powers that be. Why bet against a system that will do whatever it takes to keep the status quo? Go with the flow. Don’t fight the Fed (don’t fight a rigged system).

  7. kevin says:

    I saw this article being posted on ZH, so after a long absence, I thought I’d came back here over the new year to see how foolish this Wolf has now become.

    Boy oh boy, looks like he is going to become dinner for others instead of getting his fill.

    Wolf, you broke some of the most basic rules when dealing in the markets.

    1) Traders never talk and talkers never trade. Once you talk with your big mouth and big ego of yours, you are doomed in the markets.

    2) You broke your own sworn rule (of not shorting) and then tells everyone that you did so. Whats the point of that?

    Look, even if you do make a profit on this particular gamble, you do all your readers a disservice by demonstrating such foolish behaviors, which only encourages mindless speculation. I thought you were better than that.

    3) And what if you lose this “Big Short” of yours, you’re going to become a mighty idiot for the whole world to see, which means you talking about your trades only makes you become even more stubborn when the market goes against your position, since you’ve just told the whole world that you’re damn sure of your naked short on the SPY or SPX.

    Ego and stubbornness in thinking are unforgivable sins in the markets.

    4) There are several points in your article which are also incorrect and dangerous. Doing your naked short is sheer stupidity to say the least, and claiming that going long puts is a sure loser due to time decay is also a half-truth.

    Always hedge your bets and/or use stop-loss to avoid catastrophic loss.

    No matter how “cock-sure” you are of your reasoning or “dead-sure” of your flawless logic, the markets can still find a way to make a fool of you by making you a mighty “cock” who is dead-wrong. ;)

    In a perverse way, you would actually do well if you LOSE this short trade again and feel real pain until you cry and swear to God again that you will never do naked shorts again; because if you somehow win on this trade, you will never learn so you’d do it again and again until you eventually lose everything.

    Good Luck Wolf.

  8. LearnfromMistakes says:

    You should have stuck to your guns Wolf, learning from the late 1990s mistake in irrational exuberance.

    While I personally liquidated my equity investments outside of retirement accounts for 2020 capital gains… I would have no guts to short this market even at the ridiculous trailing trading multiple on the S&P500.

    Good luck. It’s all guess work, but if I had to guess the market will tank after the election in late 2020 or early 2021.

  9. Art says:

    Expecting market to go to all time high by Jan 20 and then crash.

  10. Mars says:

    Wolf,
    this post featured on front page lead article Marketwatch.com ten minutes ago.
    :)

    • Wolf Richter says:

      I saw that, took a screenshot for later. “Popular Wall Street Blogger Vowed…” They made nicely fun of me in the article. I love those MarketWatch guys.

  11. Paper Gold Alchemy says:

    The FED and it’s various Agents will burying Shorters under low interest rate money printing – Beware the Repo Man.

  12. Paper Gold Alchemy says:

    The biggest mistake Shorters have been making for the past decade is; they think the major financial markets actually trade freely at arms length.

  13. sunny129 says:

    Fed supported mkt – but how long?

    {..}Commenting on the repo market action, BMO’s Jon Hill writes this morning that “the short takeaway is that secured markets were tame, in no small part due to the massive scale of the central bank’s liquidity operations.”

    What was the price tag for this market “calm”? Just about $414 billion, which as Hill notes was the scope of the Fed’s footprint in the front-end: $256 billion in repo injections ($211.4 term and $44.3 in overnight) and $157.5 bn in Bill purchases. A rough approximation of this is the Fed’s repo injections (both overnight and term) and “NOT QE” T-Bill purchases since the mid-September repo market freakout.[..]
    zh

  14. MCH says:

    Woohooo, expanding audience set.

    Wolf, congrats, you’re the main article today on Marketwatch. Hope this helps to drive more readers to your site.

    https://www.marketwatch.com/story/a-popular-wall-street-blogger-vowed-to-never-short-the-stock-market-again-until-now-2020-01-02?mod=home-page

    On the other hand, they missed the part where you said Tesla shares are too crazy… I’m wondering if Mr. Musk will see this, and then call you out on Twitter as something something something… he probably learned his lesson about not running his mouth too much on Twitter because of that Thai rescue incident. But you never know.

  15. HR01 says:

    Wolf,

    Thanks for sharing your trades.

    You may be spot on with your call but might be a few days/weeks early.

    Better entry might tomorrow. Fed balance sheet should shrink a bit the week of Jan 6 – Jan 10 depending on the results of the two scheduled term repo’s. May shrink a bit more the following week as there are more than $120B in term repo’s maturing. Again will depend on the term repo results on the 14th and 16th.

    Happy Hindsight Year.

    Slainte!

  16. Andrei says:

    Wolf,

    Have you seen that on Marketwatch? :)

    “A popular Wall Street blogger vowed to never short the stock market again — until now”

    “After getting destroyed by misplaced bets against stocks, Wolf Richter of the popular Wolf Street financial blog, says he’s back at it again.”

    Congrats! Regardless of the outcome, you already made it to the headlines :)

  17. Les says:

    The big reverse repo works just like a repo when it expires. There’s more to the liquidity operations than the short-term repos, such as term lending and POMOs. It appears the Fed will keep liquidity wide open until April when the Treasury starts buying in treasuries. Best guess for when net supply will start growing is in June.

  18. Art says:

    Market will continue to go up until Jan 20. It is going to be a rough ride for you.

  19. Art says:

    The Iran crisis is an opportunity for you to get out of your shorts and go long. Iran crisis is just a short term event. Market will start upwards again because bubble is not fully in excess yet.

  20. Michael Engel says:

    RED = Green.

    NASDAQ was forced to retreat from the monthly half line.

  21. Eastwind says:

    I think whether your short pays off or not will depend on what the Fed does and your timing w.r.t. that.

    There’s a lot of term repo expiring in Jan. If the Fed lets it unwind, as they say they are planning to, and the repo market rates spike the market may tank temporarily and allow you to cash a gain if you’re quick. But you will only have a small window because the Fed will react with more repo “not QE” and the whole thing will turn around quickly.

    Maybe the window will be non-existant because the fed will react to the repo market faster than the stock market does. Or maybe the fed won’t do as they’ve said and will allow a lot of the term repo to roll over.

    As long as the fed keeps pumping QE, I think your shorts are toast.

  22. Seen it all before, Bob says:

    With an escalation with Iran imminent, (Didn’t Trump tell us that Obama should start a war with Iran to get elected?), Wolf likely made a good call in shorting the markets just for that reason. Don’t look behind the curtain on the overvaluation of the current market. If Trump waves a flag and declares war on Iran, his followers won’t care if the market plunges.

    I’m not as brave as Wolf, but I did something I’ve never thought I could do before. I bought some shares in VXX. I don’t expect to become wealthy with my wager, but Wolf continues to provide excellent backup.

    I believe in individual companies but pricing on individual stocks continues to be mind-boggling optimistic. A war should drop them back to reality.

  23. Robert says:

    Well, Wolf, you just made the front page of the Wall Street Journal (“A popular Wall Street blogger vowed to never short the stock market again — until now”), so congrats! (I think they are getting jealous of your following) And since every single MSM mouthpiece (incl the WSJ) is anti-Trump, there really could be a move to tank the markets to screw him, so you may be right- but you are really putting your head in the lion’s mouth, so watch out!

  24. Art says:

    The market always does opposite of what the general public expects. Currently, general expectation is that the market will drop due to the Iran crisis.

  25. HotTub Marmalade says:

    Looking good for your short tonight (1/5/2020) in the pre-market Wolf…

    S&P 500 Futures 3,222.12 -13.38 -0.41%
    Nasdaq Futures 8,769.88 -40.12 -0.46%

    Let’s see what the morning brings.

  26. RichWolfster says:

    so far so good!

  27. Dan says:

    Except Puts limit your downside to a known value (expiration of contract). With Puts an additional US Bond position can pay part or all of the Put insurance cost.

  28. Ron says:

    Your articles are always most interesting.
    What would you do if you suddenly had $100,000 to invest with this type of market?

  29. Anmol Mishra says:

    @Wolf Richter ZH is reporting that Fed has increased repo liquidity. Do you still believe the Fed is draining liquidity ?

Comments are closed.