Yahoo Finance 4 Reasons Why You Need to Prepare to Short the Market
There is a relief rally right now that will not last long. The past three days have seen a rally in the Dow Jones of 794 points.
The first Fed rate hike in December was delivered by U.S. central bankers as a triumph in their monetary policies for the past eight years. Thanks to their acute understanding of the economy, they brought back full employment and made the stock market jump to historic record levels at the end of 2015.
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The intrinsic value of SPY
Major U.S. indices took a heavy beating, falling into correction territory in the first few weeks of 2016. Recession worries on China's economic contraction and the oil glut were the main drivers.
The Dow Jones Composite hit the 50-day moving average in just three days, showing some strength that it may cross all the way to the 200-day moving average. Expect a sell-off anytime between these two lines.
Good news?
The market has been oversold, and there is some relief thanks to good news coming from Europe and Japan, which are not willing to hesitate on easing monetary policy even further.
Japan has spent decades fighting deflation and is an example of how a monetary stimulus should not be implemented. They recently moved to negative interest rates and will charge banks 0.1% for their deposits in the central bank.
Read: Bank of Japan launches negative interest rates
That hasn't stopped the yen from appreciating against the dollar, as the yen is considered a safe haven in economic turmoil.
Read: This indicator suggests this week's stock-market rally won't last
European markets had taken the heaviest toll on the market correction. Most European stock markets are in bear territory. European Central Bank President Mario Draghi is planning to cut interest rates even further to -0.4%. Eurozone inflation in January was 0.4% and is expected to fall into negative territory. Let's not forget German Chancellor Angela Merkel is behind the power of the European central banker, and this power is yet to be over since Merkel is having serious opposition in Germany for the effect of her public and economic policies.
Read: ECB 'will not hesitate to act' in March, says Draghi
Fed minutes
The Fed minutes just released show the central bankers fear the economy won't grow as much as they thought. They are worried about how further increases in the stock markets may affect emerging economies including Mexico, one of America's biggest trading partners, which had to raise its interest rate to avoid further peso depreciation.
Read: Fed discussed changing interest rate path: Minutes
China dumping treasuries
China decreased its position in U.S. Treasuries by $18.4 billion from a month earlier according to the U.S. Treasury Department. There is net selling by foreign governments of U.S. securities by $51.3 billion, the biggest monthly outflow on record.
Read: China's Holdings of Treasuries Decline to Lowest Since February
The world economy is expecting some bad news to be delivered. Still, we don't know what will happen with the European banks, as Deutsche Bank (DB) is said to be the next Lehman Brothers.
Wise investors should take advantage of this recent rally and bet against the market for good returns.
Some bearish ETFs that will increase in value are SDS, QID, DXD and SQQQ.
A more bearish ETF can be found here: Inverse Equity ETF List.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 5 Warning Signs with TAP. Click here to check it out.
The intrinsic value of SPY
