Shorting May Be Your Best Diversifier in 2014

To my readers:

A few comments with a conclusion that shorting may be the best diversifier in 2014.

Bonds (US corporate and government) may have a bit to run as a number of reasons are coming into play (not saying these have to be good reasons) to give bonds some bids:

1. pension portfolio rebalancing
2. Japanese pension fund saying no more JGBs (TSY offers much more yield and Yen diversification)
3. Smarter traders already thinking that the taper stops soon – and traders will trade the chart and look for reasons later so the recent bottom looked tradable.

Marc Faber says Fed will never end QE – by the way, Marc has the best long term track record on the Barrons’ Roundtable for the last 10 years averaging over 22%/year which beats most people who mock his predictions.

I do think though that it’s very possible that the sell stocks and buy bonds safety move may not work so well this year; and even looking at days like today – in the past if the DIA were down 300 in a day the TLT would be up 300. Not now – many of the safety plays were muted, even gold for now wasn’t muscular.

Mainstream Institutions, who likely reallocated out of their hedge funds and into more index strategies in 2013 are going to realize too late, that being short just might be the best diversifier in 2014. They may sell in a panic so we have to be careful. In my mind it may be too early yet for a big gold move as we may need to get a print money catalyst (Fed ends the taper abruptly) or a JGB rupture to get gold really moving.

For the amateurs, going to cash may be the best solution if things get to turbulent. Though a portfolio of bonds, gold, deep value stocks (with dividends) and put options bought on rallies could keep volatility low. I wrote in a previous post about true diversification. And 2014 has a good chance of being very choppy sideways or down. Buy and holders might want to consider covered calls – others may want to consider a bond trade, a gold trade and shorting – IF YOU HAVE TRADING SKILLS AND A PLAN.

Do some thinking out there folks and be safe.

In an upcoming post, I will discuss shorting strategies for short traders to short diversifiers