Five Reasons to Short the US Stock Market

After an historic 9 month rally in the US stock markets the upside looks limited and the bear market looks ready to resume. In the short term the US stock market is facing a lot of hurdles and I think an opportunity exists to short the US stock market for investment gains. Below are five reasons to be short the US stock market over the next 12-30 months:

1) Debt: US consumers continue to de-leverage. And they will do so for five to ten years as debt levels retreat, and savings rates increase. De-leveraging drives reductions in consumer spending and asset values. Consumer discretionary stocks will take a big hit due to de-leveraging and presents a solid shorting opportunity.

Also rapidly growing deficits at the federal and state level will eventually lead to a rise in interest rates and to the crowding out of other spending as government services debt. The effect of government servicing debt will start to have in impact on rates at the end of 2010.

2) Housing: Is not going to be the comeback story of 2010. Most of the data used to forecast housing values such as mortgage defaults, foreclosures, existing home sales and new home starts which is all available to the public, point to a housing market that is on the edge. Housing prices are going to fall for another 18-36 months (nationally) as foreclosures hit 6-7 million in the next 30 months and as the 600,00-800,000 homes foreclosed but not yet listed (shadow inventory) are added to housing inventory. Not to mention more than one third of Americans would sell their homes tomorrow (shadow inventory) if the price were right. Add tightened credit standards to the equation, the end of the home buyer tax credit in April 2010, and the slowing down of Fed purchases of agency debt (quantitative easing) in April 2010. This creates headwinds that will last until foreclosures peak and those homes hit the market during 2011 & 2012, and foreclosures will not get back to historical norms until about 2014.

3) Consumer Spending: Reduced national income due to unemployment and underemployment will reduce the spending power of the US consumer. Tightening credit policies, reduced wealth due to falling home and stock market values and reduced consumer confidence due to all of the above create a new culture of a more frugal US consumer.

4) The Banks: Banks are the lubricant of the economy when they are lending. They are now hoarding cash because they know they are insolvent if they had to dump toxic assets on the market. They are also looking at reduced activity due to the economy and new taxes and regulations, and therefore lower profits. If the Fed raises interest rates - their spreads will contract, also hitting profits. Consumer delinquencies continue to be at historical highs and commercial real estate defaults are on the rise. This all spells trouble for the banking sector and the economic recovery.

5) The Market: The market is overvalued given the realities of the economy. The historically rapid rise of the stock market from the March 2009 low’s to the January 2010 high’s saw the S&P 500 rise over 72% in just 9 months, this is just too much of a run up too fast given the economic realities. The Markets are over due for a serious correction and consolidation period.