Trader Talk: Downside Bets

While most investors look to the "upside," we'd note that many leading advisors are now looking at "downside" plays. For those aware of the risks, we offer a variety of bearish bets from Steve Sjuggerud, Elliott Gue, Price Headley, Richard Rhodes, and Bernie Schaeffer.

"The Chinese government now admits it has a credit bubble on its hands." Says Steve Sjuggerud, editor of True Wealth. "And it has been trying to burst it. So far, its efforts have failed. For the second time in seven months, the Chinese government took the unusual step of raising the reserve requirements at banks. The goal here is to force banks to hold more money, which forces them to lend out less. It hasn't worked. Sketchy loans are still being made, and bad investments are being funded. Some observers say that bad loans make up nearly half of all loans in China right now. China is making the mistake that Japan made in the late 1980s, of not acting fast enough to slow the growth of the bubble. It may already be too late. We are positioned to take advantage of the subsequent bust. We have two short positions in China, PetroChina (PTR NYSE) and China Mobile (CHL NYSE)."

"Amazon (AMZN NYSE) is a great company, but that doesn't mean it's a great stock," says Elliott Gue in his Wall Street Winners trading newsletter. "Long-term, its a textbook case of creative accounting. However, we're looking at this from a shorter-term perspective. The stock has a lot of overhead supply in the 48 to 50 area from way back when it topped out in the fall of 2003. The heavy-volume selling that offset the rally right before earnings last week tells us that the sellers are itching to take the stock down again. We're going to stick with a straight short sale and not mess with the options, as we don't want the leverage in this case. If you want to be brave though, the rule of thumb is to go slightly in-the-money for put options. And with expiration two months out, it's your choice. Ours is to stick with the stock. We are shorting the shares with a stop loss at 49.95."

Trading expert Richard Rhodes, editor of The Rhodes Report, offers a trio of short positions: "We look to establish a short position in Centex (CTX NYSE) on a ‘sell stop’ at $48.40, a level below the recent low support. If executed, place the ‘initial’ stop loss at $51.20. The trading range between $46.50 and $56.50 remains in force, with multiple support levels at $46.50 having held thus far. We will use price weakness to ‘stop’ us into a short position at $48.40. Our initial downside target is $40-$42. We also look to establish a short position in Broadcom (BRCM NASDAQ) on a ‘sell stop’ at $38.25. If executed, place the ‘initial’ stop loss at $44.00. The $37 level has held the recent decline but we consider this foray above resistance to be short-term, before prices resume their decline. Thus, we will become short at $38.25 on a sell stop. Meanwhile, we've established a short position in General Motors (GM NYSE) at $47.90. In January, prices formed a clear high, of which the resulting price action established a new downtrend. Our initial target is support at $45, with a target to $40."

"Investor optimism continues to blanket the shares of IBM (IBM NYSE), with the company bullishly featured on several magazine covers over the past year," notes Bernie Schaeffer, editor of The Options Advisor. "Furthermore, the number of IBM shares sold short plunged 13% in April to 12 million– its lowest level in three years. At the stock's average daily trading volume, these positions can be covered in roughly two days of trading. This sharply reduces the chances of the equity benefiting from a covering rally. Wall Street remains enamored of the company, with 12 of the 20 analysts following the firm rating it a "buy" or better. Any downgrades from this optimistic group could spell trouble for IBM. From a technical perspective, the shares moved lower after reporting in-line earnings results on April 15. The stock had consolidated, but failed to overtake its declining ten-week moving average, which should now serve as a layer of resistance over the intermediate term. We recommend that options traders buy the IBM January 2005 95 put."