Launch Edition: Vol.1.1 What is a Bear Market…???
He who sells what isn’t his, must pay it back, or go to prison
Selling a stock short is exactly the opposite of buying a stock in the hopes it will rise in value (long). We introduce short selling in this Launch Edition of Short Stories. To sell a stock short, the investor must first borrow it from a brokerage firm in order to then sell the stock. The investor agrees to replace that borrowed stock in the future by buying it back on the appropriate stock exchange, and returning the borrowed stock to the broker.
Selling short is fundamental to stock market dynamics. It is defensible diversification. It is also a means to augment investment performance. Short Selling does not create Bear Markets, however, it helps propel it to a technical bottom much quicker. Even more fundamentally, when these short positions unwind, it means buying back the stock that was borrowed and sold short, intensifying the bounce from the bottom. As stated in the title, if you sell it, you have to buy it back.
The technical definition of a Bear Market is a decline in stock market values of at least 20% from the last peak. Research explores this definition as it applies to four of the most recognized stock market indexes — Dow Jones Average; NASDAQ; and the Russell 2000, perhaps the most popular index to gauge stock market performance of the 2000 smallest public companies.
According to the definition of a Bear Market, only the Russell 2000 (symbol: ^RUT) meets the 20%-drop criterion. Peak Closing: 855.77 on July 13, 2007. Low Closing: 671.57 on January 22, 2008 (down 21.5%). Currently at 692.72.
Despite the stock market losses of the past two weeks, the Dow Jones Average (symbol: ^DJI) has only dropped 15% from peak-to-low. Peak Closing: 14164.53 on October 9, 2007. Low Closing: 11971.19 on January 22, 2008 (down 15.5%). The Dow closed at 12378.61. NOTE: Using the 20%-rule, the Dow would have to decline to 11333, or another 1000 points, to be labeled a Bear Market.
NASDAQ (^IXIC): Peak Closing: 2810.38 on November 2, 2007. Low Closing: 2292.27 on January 22, 2008 (down 18.4%). The Nasdaq closed at 2360.92. NOTE: Using 20%-rule, Nasdaq would have to decline to 2248, or another 112 points (5%) to be labeled Bear Market.
Based on the above definition of a Bear Market, the worst does not appear to be over. Selling the Nasdaq Stock Market short (NDAQ: $42.98) doesn’t mirror the Nasdaq Composite Index (see link- http://finance.yahoo.com/q/bc?t=1y&s=NDAQ&l=on&z=m&q=l&c=&c=%5EIXIC). There are an abundance of investment strategies to engineer…for example, note the long term relationship between NYSE Euronext (NYX: $75.65) and the Nasdaq 100 Trust (QQQQ: $43.99).
NYSE Euronext represents the commercial union between the New York Stock Exchange (and related exchanges/businesses) and Euronext N.V., an operator of a diverse array of financial products and services. One of these ‘diverse array’s’ includes cross-border exchanges providing services for derivative markets in Belgium, France, the United Kingdom, and the Netherlands.
The Nasdaq 100 Trust is a unit investment trust that consists of the largest non-financial securities listed on the Nasdaq Stock Market (NDAQ). The above long-term trend reflects the surge in these derivative markets that are now haunting the financial system around the same time the spread began in favor of NYX. As the markets and exchanges on which these derivatives traded grew, so did the liquidity and fees earned by NYX. The trend may soon reverse. Note the very latest graph:
Within the past few days, the long term premium has evaporated. Therefore, we have entered into the Model Portfolio a Paired Investment, simultaneously selling 100 shares of NYX short ($7,615 including transaction cost) and buying 200 QQQQ ($8,848). Research will include the results of this investment in its usual month-end review of all stocks written up in these pages.
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