What master trader Jeff Clark is thinking now…
“At some point things are going to turn, and they’re not going to turn when everybody’s expecting it.” – Jeff Clark
Welcome back to the Stansberry Radio Interview Series.
Every Saturday, the Stansberry Radio Network brings you the most valuable ideas from the most intriguing guests from all of our shows.
This week we’re sharing highlights from Frank Curzio’s interview with superstar trader Jeff Clark. Jeff writes several trading newsletters at S&A, including the S&A Short Report and S&A Pro Trader. Frank says, “I say this a lot… and I truly mean it ’cause I see Jeff all the time and talk to him all the time… Jeff’s one of the best traders I know.”
Below, Jeff talks shorting stocks and investing in China. Jeff is bearish on U.S. stocks, but he says you can’t avoid the momentum in the market right now… “Don’t be stupid and bet against the markets,” he warns, “because it’s probably going higher.”
To learn how a top trader approaches the markets, read on…
Stansberry Radio Network
Originally aired on the Stansberry Radio Network, June 18, 2014
Frank Curzio: We’re talking to Jeff Clark, editor of S&A Pro Trader and S&A Short Report, superstar trader and good-looking guy. Jeff, anything else you want me to add here?
Jeff Clark: Gosh, I’m not even gonna touch that.
Curzio: [Laughter] So happy that you’ve joined us again on the podcast here. I’ve been reading a lot of your stuff lately, like I always do, and I really can say you’re one of the best traders out there. What I’m seeing is stocks near all-time highs, things you mention all the time. It seems like we’re going to stay near these highs as long as the Fed maintains its easy policy. Is it safe to say that the markets are going to continue to do well as long as we have low interest rates?
Clark: Well, I mean, you can’t fight it. The fact of the matter is the bullish momentum has just been too strong. Anybody who’s tried to get aggressive on the short side just gets run over. Now, as you know, I’m bearish as all heck. I think this is such an incredible setup for the short side. But I haven’t really taken many short sides yet other than the occasional intraday trade where, if the market’s up big and looks like I might see an intraday reversal, I’ll take a short trade, scalp it, and try to exit by the end of the day for a quick profit. But I don’t hold too many short positions overnight only because we haven’t gotten any downside momentum. It’s just—it’s amazing. We’ve gone two years without any significant sort of correction. And it’s been, I think, almost three years since we’ve even tested the 50-day moving average line on the S&P. I don’t ever recall seeing a stretch that long.
At some point things are going to turn, but they’re not going to turn when everybody’s expecting it. One of the interesting things is that last week we had a brief pullback in the market. I think we lost 20 S&P points, and everybody was shouting about how this might be it; this is the big correction. And of course when everybody’s looking at things that way it tends not to play out.
So I still think there’s a lot of downside risk in the market. There’s probably a lot more risk than people expect there to be because everybody is looking at the Fed as the ultimate backstop for stock prices. But we’re really not ready to take that move lower yet. Perhaps it’ll happen sometime in the fall where these sorts of corrections typically do unfold. But right now, as long as we continue to make higher highs and higher lows on the indexes, the momentum stays with the bulls.
Curzio: Jeff, so given that scenario, how difficult is it to short stocks?
Clark: Whenever there’s a large percentage of a stock’s float that is sold short — and I think over 30 percent tends to hit my radar — that’s tells you that the professionals are in there shorting. Now professionals get squeezed oftentimes, too, so just because they’re shorting a position doesn’t mean they’re going to be right. But generally speaking, I’ll do a little extra homework on a stock where I see such a large short position to figure out if I can find out why it’s so short.
Let me give you an example. In the case of Tesla it’s easy; they’ve got a convertible bond out there, so what happens is folks buy the convertible bond and they short the stock. You have this arbitrage, so it’s not a genuine short trade. It’s not folks betting on the stock actually falling, they’re profiting off the arbitrage.
But in other cases, especially in a lot of the smaller cap names, when you see a large short position — 30 or 40 or even 50 percent – that means the professionals are in there shorting. They probably have seen something about the stock that makes them question the fundamentals, and it justifies doing a little bit of extra homework with that. Again, you can get squeezed, but more often than not when you have a super-large short position, that squeeze is temporary. You just have to have deep enough pockets to be willing to ride through.
Now having said all that, I usually don’t go out and short the actual stocks. What I like to do is buy put options on them. By buying a put option, I’m limiting my risk. Rather than shorting Tesla for $200.00 a share, I might buy a put option on it that costs me $2.00 or $3.00 a share, and so my risk is significantly lower. And right now, with the volatility index so low – I think the VIX is trading between 12 and 13 right now – put options are fairly cheap.
So it just makes more sense, to me anyway as a trader, to look at put options rather than trying to short the actual stock, and sometimes you’re not going to be able to get a short off on a stock. Sometimes your brokerage firm won’t have shares available to borrow, or sometimes you might get called in. In other words, you put a short out there, but your brokerage firm calls you back a couple weeks later and says it’s time to close the short out; we need the shares back. So put options avoid that entire situation.
Curzio: Yeah, that makes a lot of sense. I want to move on to the global markets here. One market you’ve been recently been talking a lot about is China. What’s your status on China?
Clark: Well, I like China, but China’s been in a horrible bear market the past several years. Rather than going perennially higher like the U.S., China’s been going perennially lower. The momentum is still on the side of the bears there, just like the momentum is on the side of the bulls here.
I think what’s eventually going to happen is, once our stock market peaks, we’ll probably see a valid bottom in the Chinese stock market, so it’s on my radar. I’ve taken a few trades here and there on China, and we’ve gotten a couple of good bounces and a couple of good trades off, but I haven’t taken a significantly large position in China just yet. I’m close to doing it, but we still don’t have the positive momentum over there, just like we don’t have the negative momentum over here. It’s very difficult to take an aggressive stance.
Curzio: Yeah, and you’re being modest. I mean, you’ve done very well trading. And one of the tools that they use there is FXI, right? I mean, that’s the big ETF to play. Are you playing any other ways with China or mostly through FXI?
Clark: Well, the Chinese ETF FXI is heavily weighted to the banking sector over there. And so when the Chinese market does turn, FXI is going to lead the way. And yeah, we had a pretty good trade in FXI recently, and that was based on the expectation that the Chinese market is poised to turn.
We wanted to jump into those stocks that tend to lead the way, and so we were pretty fortunate on that trade. But generally speaking, China itself really hasn’t done much. The Shanghai stock exchange has been bouncing back and forth in about a 50-point trading range for the past several months. That’s good, and when you’re looking for a bottom you want to see that sort of consolidation period in there, but we really need to see a breakout to the upside. I think if the Shanghai stock exchange can break above 2,100, then you’ll see the breakout and then it’ll be time to get a little bit more aggressive with China.
Curzio: Jeff, thank you so much for talking with me today. I know you’re busy, but I really appreciate you joining us again. I always get some great information out of you and great ideas, so hopefully you’ll join us again soon.
Clark: My pleasure, Frank. I love being on your show.
Curzio: All right, thanks buddy. Take care.
Clark: ‘Bye, take care.
Crux note: If you enjoyed today’s excerpt, you can listen to the entire interview with Frank and Jeff right here. In it, Jeff talks more about the sectors he’s watching today, as well as what he thinks you should avoid…