While counterintuitive, bear market are the most dangerous time to short stocks, Joseph Parnes lays out a strategy to short.
Covid-19 has seemingly turned the market on its head. While there are still plenty of long positions to accumulate, short selling has become rampant. However, while shorting seems like an obvious strategy to pursue, it involves great risk, even—or especially—in bear markets.
Short selling for use in a long term strategy is premised on the initial distribution of a 130/30-investment model, where the proceeds from the short sell is reinvested into long positions, rather than a short-term short selection. In other words, investing 100% of the portfolio in long positions and 30% in the short positions.
When one sells short a position one can take the proceeds from the first stock shorted and contemporaneously invest it in a stock for a long position providing 130% long and 30% short. Since this is predicated on a long-term scenario one aspires that the long position will provide appreciation in the asset value while covering the cost of the short as the lender charges a fee and interest charges for the stock borrowed. However, In the meantime assuming the short positions continues to plunge, one is making money on both sides of the coin.
One such potential candidate for a long term short position is Simon Property Group (SPG). SPG is seen as one of the global leaders in the ownership of premier shopping centers, dining and entertainment destinations which have generated billions of dollars in rental and sales. SPG is located in the North America, Europe and Asia and had been impacted by the Coronavirus. SPG’s business model is likely to face continued uncertainty and challenges from the initial effects of the Coronavirus as well as the residual impact from government lock downs and social distancing. Most of the occupants of its properties will be deferring rental payments and will be unable to generate sufficient income in the foreseeable future.
Since March 20, 2020 when it sank decisively with heavy volume below the bottom leg of its death cross mode where its 50-day moving average falls below the 200-day moving average. SPG has continued to plunge multiple times. These multiple plunges were confirmed by heavy short selling and exiting by high frequency traders (HFTs) and institutions. Subsequent attempts to mitigate SPG’s hemorrhaging include pay and salary cuts leading to the inevitable suspension of its once hefty dividends, which were at $8.40 yielding 15.82%. Further damaging news is SPG’s recent potential merger with REIT Taubman Centers for an all cash deal valued at $3.6 billion leaves little room for a potential rebound.
Technicals
Taking a look at the technical side of SPG, it must be noted that it had been trading from November 2019 through mid-February 2020 within a narrow range, well below its established death cross pattern. Covid-19 has caused SPG to tumble 75% in comparison to the S&P 500, which fell 25%.
Various support lines have been broken with the expectation of SPG’s earnings to continue to erode. Since the plunges were so severe and quick any forceable reversal may take a long time. Such a reversal has to challenge the covering resistance line in order to break out the bottom and upper legs of its death cross. SPG does not appear to have reached its bottom, providing short sellers with an opportunity to continue for the conceivable future.
52-week high/low: $180.052/$42.25
Market Capitalization: $17.32 billion, EPS: 6.81, P/E: 8.33, Beta: 1.32
Dividend/yield: 8.40(14.97%)
RECOMMENDATION
SHORT RANGE: $44-$58
COVER SHORT: $28
STOP LOSS: 83
Joseph Parnes has no short positions and or holdings in (SPG).
Joseph Parnes is the President of Technomart Investment Advisors and publisher of the Shortex market letter. Joseph is the author of the recently published educational book, “Short Selling for the Long Term”, Wiley 2020.
