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Should I short the S&P 500?

Published by: Lucien Paulemil
June 18, 2022 1:42 pm

Markets across the globe have been extremely volatile for the most part of the past two years. Markets saw a sharp drop in March 2020 when Covid-19 started spreading across the globe, resulting in a sudden halt in activities within both manufacturing and service industries alike. S&P 500 fell nearly 24% within a span of five weeks before rebounding late in March, as market participants thought the market was reaching its bottom and eventually ended up nearly +18% at the year-end. This period was unprecedented and none of the investors had seen anything like that before.

In 2021, markets were in a different mood where retail investors became extremely active in the markets and gave rise to ‘meme-stocks’ period in late January. During this period, retail investors started shorting stocks like GameStop and AMC that were owned by big hedge funds like Melvin Capital, resulting in some of these institutions eventually closing their businesses. ‘Shorting’ means borrowing a security and selling it on the open market. You then purchase it later at a lower price, pocketing the difference after repaying the initial loan, in simple terms an investor who is shorting is betting that a stock will decline in price in the future. Even though markets remained extremely volatile in 2021 as concerns around Covid-19 continued and issues surrounding supply chain and inflation became prominent, S&P 500 ended the year up just over 29% resulting in a third year of strong performance for the index.

Inflation became a major theme in the second half of 2021 which continued into 2022, markets expected inflation to come under control as Federal Reserve were expected to raise interest rates. And supply chain issues were expected to ease but Russia’s war in Ukraine changed the market dynamics, especially in the energy industry and the sector saw considerable jump in the following weeks.

Since February, markets have been extremely volatile as inflation remains quite high at 8.6% as of May vs the fed’s target rate of 2%. Russia’s war in Ukraine continues to have impact on energy prices and increase in interest rates and tightening of fed’s balance sheet continues to pull back the market from its January highs.

The question now arises whether you should short S&P 500 at this point, the answer is much more complicated than a simple yes or no. S&P 500 has been down around 20% as of 13th June. The market has divided opinions on where it is headed for the rest of the year. Some market participants presume that it is bottoming, while others believe that it is headed for a long-term bear market, as implied by the technical analysis. The decision to whether you should short the S&P 500 or buy more into it depends on which camp you fall in.

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