Weeden’s Purves: Consider Shorting Small-Cap Stocks to Play Market Decline

Tuesday, 23 Oct 2012 11:30 AM

By Dan Weil

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The stock market will likely drop 3 to 4 percent over the next few weeks, and the best way to play that move is by shorting small-cap stocks, says Michael Purves, chief global strategist at Weeden & Co. brokerage.

Given the recent news of slumping corporate earnings and slowing global economic growth, "the near-term risk is definitely to the downside" for stocks, Purves tells Yahoo. “People would be well served to be hedged going into the election."

And why does Purves prefer shorting small caps as opposed to large caps?

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

"In my mind the S&P 500 is not as good a hedging vehicle because of its ‘high-fortress’ companies, with strong balance sheets and strong dividends, that act as sort of quasi-bonds," he says.

Purves recommends using options on the iShares Russell 2000 Index Fund (IWM) to short small-cap stocks.

That strategy is a lot cheaper and less risky than shorting the stocks themselves. For example, you could buy a put option on the fund.

Many experts view both stocks and bonds as headed for declines. "Equities and bonds in America are seriously overvalued," Andrew Smithers, chairman of financial consultancy Smithers & Co, tells The Wall Street Journal.

Given various valuation measures that support Smithers’ point, Journal columnist Brett Arends even suggests that now might be the time to deploy what many financial advisers consider the ultimate no-no: market timing.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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