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if I thought the US market was grossly overvalued...

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2boi
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if I thought the US market was grossly overvalued...

#425739

Postby 2boi » July 8th, 2021, 1:30 am

The Dow for example looks ridiculously high to me. What is the simplest way to short a whole index?

Midsmartin
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Re: if I thought the US market was grossly overvalued...

#425746

Postby Midsmartin » July 8th, 2021, 6:57 am

I would probably go for a spread bet. And be prepared to lose a lot of money if it keeps going up!

NotSure
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Re: if I thought the US market was grossly overvalued...

#426124

Postby NotSure » July 9th, 2021, 11:30 am

2boi wrote: What is the simplest way to short a whole index?


Inverse ETFs?

https://www.investopedia.com/investing/bear-market-etfs/

Lootman
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Re: if I thought the US market was grossly overvalued...

#426128

Postby Lootman » July 9th, 2021, 11:40 am

2boi wrote:The Dow for example looks ridiculously high to me. What is the simplest way to short a whole index?

The Dow is a very quirky index. It only has 30 names, is weighted by nominal share price rather than market cap, and is still skewed towards the old economy - it is the "Industrials" index after all.

So if you think the US market is frothy then you probably want to short the S&P 500 or even the Nasdaq 100 instead.

Also some of the frothiest names are not in any of the major indices yet. In fact Tesla was only added to the S&P 500 a few months ago despite now being the 5th or 6th biggest name in it.

I would use put options on a major index ETF if I was bearish, but I am not.

monabri
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Re: if I thought the US market was grossly overvalued...

#426133

Postby monabri » July 9th, 2021, 11:47 am

If you have to ask then I'd tread very cautiously.

Midsmartin
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Re: if I thought the US market was grossly overvalued...

#426200

Postby Midsmartin » July 9th, 2021, 2:58 pm

Points in favour of a spreadbet if you really wanted to do this:

1. For most stocks/markets the minimum is quite small. I just checked the IG app. The minimum size for the S&P is £1 per point. So you can try it out without losing shedloads of money. if The S&P in fact goes up 10%, you'd only lose £450.

2. No capital gains tax.

I treat my small spreadbet account as a mini-ISA, with long term small positions in half a dozen shares.

I rarely short things. I have tried and I'm no good at it. On average over the long term the market generally goes up. If you think it's going down, you have to be very sure that the thing in question is going down, or very patient with deep pockets.

3. If you want you can set a guaranteed stop loss at a definite price - it'll cost you a premium though. And stops have a habit of being triggered unexpectedly at times when the price spikes.

I'm very careful that my margin requirements are only a fraction of the cash on my account. Nobody likes a margin call email! When I place a bet I always translate it into the value of shares I'd be buying(or selling) and also consider how much I'd win/ lose if it moved say 20%. ie £1 per point on a thing priced at 4000 (eg the S&P) is a bit like owning (selling) £4000 of shares. Am I comfortable with that?

Disadvantages: the % costs of trading are probably higher than with an ETF or an option. And options are trickier to get your head around!
It is easy to get caught up in making frequent short term bets, and this in my hands is a way to lose money.

gryffron
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Re: if I thought the US market was grossly overvalued...

#426229

Postby gryffron » July 9th, 2021, 5:18 pm

I think you're right. BUT...

“The markets can remain irrational longer than you can remain solvent." - John Maynard Keynes 1930

;)

2boi
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Re: if I thought the US market was grossly overvalued...

#426276

Postby 2boi » July 9th, 2021, 9:04 pm

gryffron wrote:I think you're right. BUT...

“The markets can remain irrational longer than you can remain solvent." - John Maynard Keynes 1930

;)


Very true, Dow is up again today - 1.3%! How about this mixed metaphor from George Soros: “When I see a bubble forming, I rush in to buy, adding fuel to the fire. That is not irrational.”"

NotSure
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Re: if I thought the US market was grossly overvalued...

#438644

Postby NotSure » August 31st, 2021, 12:50 pm

An old thread, but I recently saw a somewhat interesting analysis making the case that US is not as over-valued as it looks at a glance.

It (the analysis) looked at PER, but on a "like-for-like" basis, and concluded that, like-for-like, the overall PER was not that out of line with historic norms. It is just that the type of companies that tend to trade at (what used to be) elevated PERs have come to dominate, making US overall look far pricier than it may be in reality.

They back tested this by looking around the dot com bubble, and found that then, like-for-like PERs were exceedingly high, but that it was not the case today.

The article is not up to the usual standards of this forum, but this is the 'how to invest' board :D May be behind paywall, but can usually be circumvented by opening in an 'incognito' window.

https://medium.com/alpha-beta-blog/why-the-stock-market-is-less-overvalued-than-you-think-2c6ff12e7c71

murraypaul
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Re: if I thought the US market was grossly overvalued...

#438686

Postby murraypaul » August 31st, 2021, 3:42 pm

Surely that is making the argument that the US stock market wouldn't be that overvalued if you bought it in equal weights?

It doesn't seem to disagree that it is overvalued as it would normally be bought, by market weighting.

And in fact doesn't that make it more risky, as the overvaluation is concentrated in a small number of very highly weighted stocks, so a small movement for them makes a large impact on the market as a whole?

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Re: if I thought the US market was grossly overvalued...

#438690

Postby 1nvest » August 31st, 2021, 3:51 pm

Lootman wrote:
2boi wrote:The Dow for example looks ridiculously high to me. What is the simplest way to short a whole index?

The Dow is a very quirky index. It only has 30 names, is weighted by nominal share price rather than market cap, and is still skewed towards the old economy - it is the "Industrials" index after all.

So if you think the US market is frothy then you probably want to short the S&P 500 or even the Nasdaq 100 instead.

Also some of the frothiest names are not in any of the major indices yet. In fact Tesla was only added to the S&P 500 a few months ago despite now being the 5th or 6th biggest name in it.

I would use put options on a major index ETF if I was bearish, but I am not.

LEXCX is a sort of US mutual fund that originally bought and held 30 stocks that nowadays is down to 22 I believe. True long term buy and hold. Comparing its total return to the S&P500 total return since 1985 there's reasonable similarity despite it having become considerably tilted - for instance around 40% in a railroad stock IIRC

The Dow for example looks ridiculously high to me. What is the simplest way to short a whole index?

If you're holding a index then selling that 'shorts' it. If a bunch of stocks that are intended to reflect the broader index then a 3x short ETF can negate the exposure. Similar if you want to take a directional short alone, third in 3x short, two thirds cash or just 100% in the 1x short. Of the two I prefer the 3x third approach as that way your maximum downside is a 33% loss.

NotSure
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Re: if I thought the US market was grossly overvalued...

#438712

Postby NotSure » August 31st, 2021, 4:58 pm

murraypaul wrote:Surely that is making the argument that the US stock market wouldn't be that overvalued if you bought it in equal weights?

It doesn't seem to disagree that it is overvalued as it would normally be bought, by market weighting.....


That's not quite how I read it - it is pointing out that while the index PER is in what historically would be considered full-blown bubble territory (greater than 1999), a case can be made to justify the index PER in a way that couldn't have been made in 1999 - the dominant stocks this time are hugely profitable, fast growing companies, the type that generally trade at above average PER. So valuations (arguably) haven't really gone through the roof, rather, highly valued companies have come to dominate the index.

As for concentration risk etc. I think that is a valid, but a separate aspect.

latimo45
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Re: if I thought the US market was grossly overvalued...

#446957

Postby latimo45 » October 1st, 2021, 2:00 pm

If you know about option trading, you can sell a long dated call option or buy a long dated put option.

csearle
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Re: if I thought the US market was grossly overvalued...

#447370

Postby csearle » October 2nd, 2021, 11:03 pm

latimo45 wrote:If you know about option trading, you can sell a long dated call option or buy a long dated put option.
Welcome to The Lemon Fool! Chris

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Re: if I thought the US market was grossly overvalued...

#447835

Postby AWOL » October 4th, 2021, 6:50 pm

Good luck! The problem is that equities are overvalued by absolute measures, eye wateringly so, but not by relative measures (premium over bonds). So they are unlikely to be immune from rising yields unless there is earnings growth to compensate. However lets consider what one can do... well the problem is that those overvalued absolute metrics are unreliable for short term market timing. So good luck.

You may be considerably smarter than me and know of reliable timing tools that I don't understand and if so you could try explaining me but I am unlikely to feel comfortable using them :D


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