With S&P 500 and other US stock indices near record highs, should you consider shorting US stocks in case the bubble bursts and the decade-long bull run comes to an end?
We all know that you should never shout “Fire!” in a crowded theatre, and it’s not my intention here to send everyone scuttling toward the exits. But with US stock indices at or near record highs, it’s worth me asking “What if?” as a way of introducing the idea that most online brokers make it as easy to bet on falling prices (by “going short”) as to bet on rising prices (by “going long”).
If you think that the decade-long bull run — which was only temporarily punctuated by the coronavirus pandemic — has almost run its course, you could consider actively shorting stock indices rather than simply stepping aside.
To be clear, the focus here is on US stock indices that have gone stratospheric, but the same can’t be said of the UK’s FTSE 100 index that hasn’t even returned to its pre-pandemic level.
How & Where to Short US Stocks Today?
One way to short US stocks without having to pick individual losers is to “sell” the US indices such as the S&P 500, Dow Jones Industrial Index, and Nasdaq-100, which you can do via these brokers:
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What are the US Stock Indices?
The Dow Jones Industrial Average is an index of the 30 largest US stocks, which may well appear on your broker’s website under another name such as “Wall Street”.
The Nasdaq-100 is an index of the 100 largest non-financial (mainly tech) companies listed on the Nasdaq stock exchange, which may well be called something else such as “US Tech 100” on your broker’s website.
The S&P 500 is an index that tracks 500 large companies listed on US stock exchanges, and your broker might give it a different name such as “US 500” or “SPX 500”.
Should You Short US Stocks Right Now?
The purpose of this posting is to tell you that you CAN short US stocks by selling US indices via an online broker, but not necessarily that you SHOULD. However, several successful traders think it’s something you can consider.
According to online reports, veteran GMO founder Jeremy Grantham thinks that we are witnessing a "fully-fledged epic bubble". “Rich Dad Poor Dad” author Robert Kiyosaki and trading legend Stanley Druckenmiller share similar sentiments. And CEO & Chief Investment Officer of Richard Bernstein Advisors, the eponymous Richard Bernstein, recently told CNBC’s Trading Nation: “We are right in maybe the biggest bubble of my career.”
Michael Burry, one of the main protagonists of the movie “The Big Short”, and someone who made millions by shorting certain securities in the run-up to the last financial crisis, is on record as describing the current markets as the "greatest speculative bubble of all time in all things".
You can be like Burry, but bear in mind that he’s been saying something similar since at least 2019.
US Indices Price Targets 2021
“Prediction is very difficult, especially about the future.” So said the late Danish physicist, Niels Bohr.
While we can’t predict when the US stocks bubble will burst, we can consider how far stock indices tend to fall when they turn south. Due to the turn-of-the-millennium dot-com crash, the Nasdaq-100 index lost about 80% of its value, which — if repeated today — would take it from about 15120 to 3024. During the 2007/08 financial crisis, the S&P 500 index fell from about 1530 to about 735 for a nearly 50% loss.
As Mark Twain is reputed to have said, “History doesn’t repeat itself but it often rhymes.”