As discussed in the trade of the week, cash was king today if you were a bull and index shorts were large winners. If you followed my trade in ProShares UltraShort Russell2000 (TWM), you’d be up around 18% today. Not bad for one day of work.

The S&P500 downgrade created a brutal wave of selling today that was nothing but relentless. President Obama was set to speak at noon central today. We knew it was about the downgrade, but didn’t know what he’d say about it. Next thing market players knew, the conference was delayed until 12:30pm central. Market players started thinking maybe he had some important news to discuss hence the delay. Maybe it was something that the bulls could rally behind. Then the President was promptly 30 minutes late to that already delayed time. On top of that, he had nothing of substance to say, so the markets had a more severe sell-off after that press conference was over. The markets seemingly have lost faith in our leadership.

SP500 Chart

The good news is, the economy is not as bad as the markets are indicating. The S&P500 downgrade, while never good, is not as bad as it seems. The fact that we are downgraded is bad, I do not want to make light of that situation. However, the downgrade itself does not mean we are going to default like some are leading people to believe. The President of the S&P500, Deven Sharma, spoke on CNBC today and discussed the reasoning for the downgrade. To paraprase two key points he discussed. France now has a higher credit rating than the United States and some simply can not believe that. They feel the S&P500 is trying to do harm to the United States. Sharma stated that France has a higher level of debt to GDP than the United States. The key point is that he said France has taken initiative to start reducing debt and that the debt to GDP is lowering while the United States is only growing debt and still projecting significantly higher debt. We all know that history has proven any government financial projections tend to be very conservative in areas as such so the debt is likely to increase more dramatically than projections.

Another very key point that Sharma made was that this downgrade does not mean we are going to default. All it means is we are riskier as a nation than last year. That is very bad in itself, but this is not Armageddon. Keep your head on straight and don’t get emotional in all this panic, that is when you will likely make terrible judgement calls on your portfolio.

As stated many times before, I repeat myself like a broken record as in this industry you need to, I am mostly in cash and not trying to force any moves. I am now holding higher levels of cash since I reduced my TWM position that was highly profitable today. I anticipate a bounce this week that may be enthusiastic but likely short-lived. That bounce may be a good time to add back to my short position. China came out with better than expected CPI and PPI numbers tonight, so hopefully that helps fuel a bounce on Tuesday. Get some rest and relax. The downtrend is unlikely to be over anytime soon, but the world is not going to end. Ben Bernanke also speaks on Tuesday so we may be handcuffed to any rhetoric the fed states. I’ll likely have an uneventful day rather than forcing many trades with no edge.

Rick Santelli’s Logical Rant On The Downgrade (Starts at minute 3)

Kudlow Report on Stock Market Sell-off


As always, do your own homework to see if you agree. Good luck out there.

Mike

At the time of publication, Kudrna was long TWM but positions may change at any time.

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