Longs and Shorts

As bull markets progress you get regular sector rotation. We've seen that consistently since this bull market started over 13 months ago.

Another classic characteristic of bull markets is that correlations among stocks drop off dramatically.

You see, when volatility spikes, which tends to happen in bear markets, correlations among stocks shoot towards 1.

In other words, they move together. On "up days" most stocks all rise in unison. On "down days" they all sell off at the same time. Correlations are very strong during times of market stress.

In healthy market environments, however, which we've obviously been in for some time now, the opposite occurs.

Correlations fall off a cliff and head towards zero.

Here's the 6-month correlation among S&P500 components dropping precipitously since last Fall:

And here's a shorter time frame, the 3-month correlation.

Same thing.

Dropping hard since the fall:

And while all this is all perfectly normal, I think this next rotation we're currently getting is likely to come with some selling in certain stocks and sectors.

Perhaps some well-deserved profit taking at some logical levels?

The back half of 2023 is likely to be filled with both long and short opportunities, as opposed to the relentless bid higher in stocks we saw during the first half of the year.

It's been hard to make money shorting stocks in what turned out the be the greatest first half to a year in the history of the Nasdaq.

The S&P500 is putting up historic returns quarter after quarter.

Those are not good times to be looking for shorts. Quite the opposite, in fact. So we haven't.

During the back half of the year, however, I think there will be plenty of both - longs AND shorts.

On this week's live call we discussed shorts in $META and $NFLX. And there are more out there.

Premium Members can check out the full video replay here and download all the slides.

Give it a watch and then let me know what you think!

JC