Shorting vs. Inverse ETFs | Podcast Episode #212

0:07
Hey, I’m Ryan Mallory and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex ever-changing, world of Finance, learn what it means to trade, profitably and consistently managing risk, avoiding the pitfalls of trading. And most importantly, to let those winners run wild, you can succeed at the stock market and I’m ready to show you how, hey, everybody, this is Ryan Mallory with Swing Trading the Stock Market in have a good episode.

0:35
Good for you guys. Today, we’re talking about shorting the market getting a better understanding what it means to short the market plus whether or not it’s best to use ETFs like inverse ETFs for shorting the market or just shorting it index just playing out, right?

0:52
And for this episode, this gentleman asks to be called Cowboy that’s his nickname out in the midwest where he is from, he writes, Ryan have a few questions for you. I’m new to trading just started this summer taking an interest in the stock. If Market, just as a side note, having just started this summer in the stock market, the worst Market that he has seen so far as essentially, the sell-offs in September and October.

1:16
He goes on to say, I learned very quickly that I have no idea what I’m doing and have made many costly mistakes since then. I started doing a lot of research on the stock market and stumbled upon your podcast. It is taught me a lot and I’m very appreciative of the information you have provided.

1:33
I have been just listen to all 211 episodes. And for those keeping track, this one here is 212. And I’ve also joined the trading block. Everything you have discussed about the emotions doubling down. Serial killer trading holding through the earnings, not using stop losses.

1:49
I have done those things. Not real proud of it either, but you have helped me with the discipline patience in the psychological aspect of trading, I don’t want to give up, and thanks. To you, I’m going to hang in there, let me just say to folks, I’ve come across so many Traders over the years that they really don’t, give it a whole time to play out to see whether or not they’re going to be successful in the stock market.

2:09
And I often wonder how many people could have been really good Traders if they just give themselves more time. I mean, you think about, if you want to be a surgeon or if you want to be a lawyer or you want to be anything that requires a skill, it takes time. And if trading was easy, everybody would be doing it.

2:25
I mean, there is a lot of people doing it right now, but most people are not successful. They’re just blowing money but all those people are blowing money or being discouraged by perhaps their recent results. They’ll throw their hands up in the air. Say the market is rigged and walk away from it and never come back rather than just trying to learn and trying to embrace more.

2:42
I mean, it’s not going to come easy, it’s a struggle to become a good Trader. And the part of this podcast is to kind of smooth the edges a little bit to make it easier for you to become a better Trader. But it still doesn’t mean it’s going to be overall an easy experience. You’re going to have your ups and downs. Cowboy goes on to say.

2:57
I am a A small business owner in the manufacturing industry, a small machine shop to be exact over the past year and a half. I have watched the government print more money than Carter has pills. That’s an old saying that I’ve heard my dad say, for years. Well, I got to be honest, I’ve never heard that saying in my life.

3:14
I’m Gonna Keep it in the back of my mind though because who knows that a cocktail party or somewhere else? I’ll be able to use that to illustrate something crazy going on. But from what I’ve witnessed all of this money printing has led to the most of the employment problems and inflation.

3:30
Drum pal can say what he wants but this was never transitory. I’ve been seeing inflation all year long with costs of goods and material and no end in sight. All going up, all the spinning will have to be reconciled at some point and the American people who pay for it through higher or new taxes. The point I am getting at, from what I’ve learned, I don’t think that the future looks too bright for the Bulls Manufacturing.

3:49
Generally goes in seven and nine year economic growth spurts before having a You Badgers and things have been going pretty good since 2012, which would be about nine years to me, observing all that is going on. I can see repercussions from the past year and a half. I’ve been following your technical analysis and stock market and there have been a lot of chatter about shorting.

4:07
The market I’ve been researching the short-selling, but could you explain a little bit more in depth about shorting? How to short the risks involved in shorting and possibly shorting versus investing into ETFs? Like the trade psq that we were in not too long ago. By the way I’m still in psq because my stop-loss never triggered.

4:23
Gerd. That’s another question. I have. How does that happen? That’s the second time that I’ve had a stop loss, not trigger. Well for those not in the trading block that was a trade setup. That was taken, I don’t know. Probably a couple weeks ago. It actually did not work out but it was stopped out.

4:38
So I’ll talk about why it might not have stopped out for some people versus others. Anyways, maybe you’ll find this email podcast worthy. And if you do, please make sure to call me Cowboy. Thanks for taking the time and putting in the effort to help us rookie Traders. By the way, I’m not a And Hebrew.

4:54
Thanks Cowboy. That’s a lot to unpack. Don’t you think? And we’ll get into all that and more? But first, what am I drinking? Well, I am drinking, Heavens doors, double barrel whiskey. It’s one of those two, that’s by another music singer. You probably heard of them, Bob Dylan, and I could have sworn. I’ve already reviewed this one, but I went through all my notes, from all my previous podcast, could not find a trace of the bourbon and the guy who edits these for me, you know, he keeps a spreadsheet for me and I always appreciate She ate that and I could not find this bourbon anywhere, and I’ve had it forever, but Heaven’s Door, double barrel.

5:30
Whiskey has a little bit of like a rustic taste. Like if you were working in the steel mill and the 1930s and he went to a local pub or bar afterwards, you’d probably grab something like this from the 1930s from a tasty and point. It’s got a little bit of spice in it. It lacks a little bit of a punchiness.

5:47
I mean, if you’re gonna go for a double barrel whiskey, I would go for Woodford. Reserves that, I mean, that’s probably one of the best one that you’ll come. Across, especially for the price. If I’m just looking for a general bourbon, that’s going to be a little bit cheaper than this one. I would probably go with old Forester Statesman. I think it’s better.

6:02
It tastes better. This one here, I can’t really give better than a 5.7, which is a huge disappointment, because this is one that a lot of people talk about, but it just doesn’t perform for me. It just doesn’t now wouldn’t call it every day stripper. Again, if I was the using everyday sipper and I needed a double-barrel whiskey, I would go with Woodford, Reserve, or a cheaper version, but a higher rated.

6:23
Whiskey would have been old Forester Statesman, I think that’s a better 15.7. Just hard to make that one considering the price and every day sipper and again there’s nothing significantly wrong with it, just doesn’t impress. And before I forget, make sure you go to swingtradingthestockmarket.com, to support this podcast.

6:40
You will get all of my daily market research, that’s going to include my daily watchlist. Also my weekly master, watchlist, that I provide at the beginning of each week plus updates on all the things stocks, the S&P 500. Now Back and Russell 2000.

6:55
So check that out. swingtradingthestockmarket.com and back to Cowboys questions here, one of the things and it wasn’t really a question, but it was more of a outlook on the economy. You want to make sure that you don’t try to tie together the economy and the stock market and even more.

7:12
So, you want to make sure that you don’t try to tie together, your political Outlook with the stock market either. And the reason why I say that, remember after bush left office and then Obama became president, I said, Man, good luck with that one. We’re coming out of the Great Recession. I don’t see much hope for this Market be, I’m gonna hold up for another four years before we get a recession.

7:30
I mean that’s gonna be rough for him to try to hold up the economy going into a second term. Well, lo and behold, the market just kept skyrocketing the first four years of his presidency. Go into the second term thinking, no way he can keep this bull market running until 2016.

7:48
Well, we go from 2012 to 2016 election markets up, still then Trump. Comes president. And I’m thinking to myself, no way. Trump can keep this bull market running for another four years. And yes, you did still have the covid sell-off back in March a 20/20, but overall, the market performed great during his presidency, and then, of course, you get to buy it in.

8:08
And here, I find myself against a, no way. This Market can last, all four years under the B Administration and the jury’s still out on that. But the first year we’re into it, the S&P 500’s up pretty good. The NASDAQ set pretty good as well. So my economic Outlook Cook doesn’t always match up with what the stock market wants to do and it’s not going to be the same for you.

8:28
So it’s always important to keep those two separated because you can have some crazy things go on in the economy and yet the market still performs and it almost does sometimes exact opposite of what you think it should do. The one thing that I would probably tie-in from an economic standpoint is what the FED does because you don’t want to fight the FED because usually what the FED does, is what the market will follow.

8:49
The interest rates are low in the feds, keeping them low, the markets, probably going to Rally. If they’re tightening rates and interest rates are going up, the markets, probably going to sell off and it’s not going to be a favorable trade environment. The last time we saw the FED attempt to taper was 2018 quarter for they also started raising interest rates, we had like a 30% sell-off, that was pretty crazy.

9:10
So the old saying, don’t fight the FED Rings, very true. And that’s probably the biggest thing that would follow from a long-term standpoint is the direction that the feds providing? But you can worry about the Factoring being an issue but it doesn’t necessarily mean that the markets going to show that in the price of stocks.

9:29
Now, do I think the market is overbought due for a correction? Do for even a recession? Yeah, I do and I think would be good for stocks if we can get a 5 10, even 20 percent pullback and stocks because it’s going to provide an incredible opportunity of new long positions, both from an investment standpoint and a swing training standpoint to take advantage of the best opportunities comes out of a Major Market pull back.

9:52
And for a lot of us, we’ve never really seen a true inflationary environment. I would say, the last time that happened was the 1970s I wasn’t around then. And so the inflation can cause some headaches for the stock market, which is what we’re already seeing over the past week week and a half or so, and the market as a whole.

10:10
So, be careful. And I’m speaking the cowboy here of how much you try to tie together, your political and economic Outlook with the stock market. Because even if there is a correlation there, the timing might be off. The economy might be Towering, but it might not be until months and months later before you actually see the stock market do the same.

10:27
And cowboy also asks, about shorting the stock market and I have this illustration and if you already know it’s shorting, the market is or have a firm understanding of it. I wouldn’t say just fast-forward through this because there’s actually a good illustration that I’ll provide and people will ask you in the future.

10:43
What does it mean to short stocks? I get it all the time. Just from talking with friends and family and you can use this illustration. I always think about it this way. Your friend has this pair of sunglasses. They’re worth $100. You go out to him, you’re like, hey, can I borrow those sunglasses? He said, sure, man. And he gives you the sunglasses.

10:59
Well, you’re wearing them, you’re probably going to keep him for like three or four weeks, but then you have a friend to doesn’t know the guy that you borrowed him from. And he says, hey, can I buy those sunglasses off of you? I like those. You’re like. Yeah. So to you for $100 so you sell it to him for $100 knowing good.

11:15
Well that you kind of owe. Somebody a pair of sunglasses, still your close friend, you still owe me a pair and three weeks comes up and well you’re going to need to get him. A pair of sunglasses. Well, you’re able to find a brand new. On the internet for $50. You’re like man, this is good.

11:31
I’m going to go ahead and buy these. You go ahead and buy them and give them back to your friend or friends. Happy as can be. You got his sunglasses back and then you sold his previous sunglasses to some other guy for $100 bought back, an identical pair for $50. And everybody went home happy and you made $50 off of it in the process and that’s the same thing as stocks.

11:52
You’re borrowing the shares from your broker, you’re selling them immediately to Um, random Joe Schmo out in the stock market, but at some point, you got to return those shares to your broker. And before that happens, you want that stock that you just sold that you had borrowed to drop in value so that you can return it to them and you can make a profit and everybody goes home happy.

12:14
But on the flip side let’s say that you Bart the sunglasses and you didn’t realize it but they ended up becoming an instant classic and nobody could find them anywhere hardly without paying a premium and all of a sudden, they’re worth $150. Well, then you got to go back and buy them at a hundred and fifty dollars in return them to your friend and you just lost $50 because you sold it to your other friend originally for $100, but had to buy them back from somewhere else at $150 cream just to make sure you settle your debt with your other friend that can happen the same way.

12:45
I mean, stocks can go up after you short him obviously and then when you’re buying back or when you’re covering, you might be covering at a higher price and you’re going to lose money that way or would be even worse. You know, those sunglasses they become a Antique of Priceless value and then you just wipe yourself out trying to get that pair of sunglasses.

13:03
Back to your friend. I mean if a stock gets bought out, when you’re shorting the stock, you’re going to pay a huge premium. You might pay 60, 70 percent premium on a stock that’s getting bought out. So that’s the best way to explain it. And of course, to you have to have a margin account and you’re going to be charged interest from the broker for borrowing those shares.

13:21
Even though you’re borrowing shares and not money, you’re still borrowing, so they’re going to charge you for the value of those shares. Interest and of course, there’s always taxes too, but we’ll leave that out for the Simplicity of explaining what shorting is.

13:33
Now, he also asks another good question here and he says, why do you often times trade in inverse ETF like psq, instead of just shorting QQQ and I also dealt with spy, instead of shorting spy, I’ll buy a sh, it’s a one-to-one inverse ETF.

13:48
You can also do 3 2 1 inverse ETSU can do like you Pro. You PR o, you can do 2x ETFs like Ql D and Q ID on the NASDAQ 100 TNA and tza, which is a 3 2 1 Ultra on the Russell, or the iwm.

14:07
So there’s a lot of options there. But I usually choose to do one-to-one, inverse ETFs, because it also allows me to keep the risk tight. And if I want to increase my short exposure, I’ll just buy more inverse ETFs. I don’t necessarily have to start off with 2 to 1 or 3 to 10 less. The reward to risk ratio is really ideal but there’s benefits to to getting long.

14:27
Because ETS they reset every day. So, if you sort of stock you say, and I know spy doesn’t trade a $100, but for the Simplicity of this example, let’s say spy is trading at $100, and there’s this major market crash, and it goes from 100, over a course of a few months down to $50, well, spies down 50%, and let’s say it drops from 50 to 49 dollars.

14:52
Well, if you’re shorting spy, you really just made a one percent, even though the market dropped At that day 2% because it’s so far down. You’re not really getting the same bang for your buck, just like when you buy a stock at 100, and it goes up to 200 and it goes up one percent, the 2002.

15:09
It’s like you just made two percent, not one percent because of your cost basis of the cost, basis changes everything. So when you’re buying the inverse ETFs, and that particular example with the spyware, it goes from 15 down to 49, your inverse in ETF will have made two percent of not just one percent because it resets every day.

15:26
So it’s going to reflect What it does that particular day in the market and because the compounding and everything over time, you’re probably even making more than that when considering your cost basis.

15:39
Now, there are some downfalls to use an inverse ETS and that is there’s a Time Decay element on them as time goes on. There is some time to K that will hit you in it’ll hit you even faster if you’re using something like a 3 to 1 or a 2 to 1 inverse ETF, which is also a reason why I so often, we’ll just stick with the one-to-one, inverse ETFs.

16:01
So the takeaway in all of this one, don’t let your political And economic outlooks, Cloud your decision, making when it comes to the stock market because all three of those things, the political the stock market and the economic outlooks, while there may be some correlation are all separate from each other.

16:17
Same thing is to remember the differences between shorting an index outright versus just buying the inverse ETF of that index. Remember there’s a element of time Decay or there is also the opportunity compound your money Faster by using the inverse ETS, rather than short in the market.

16:27
You enjoy this episode. I’d encourage you to leave me a five star review, man. Those things really help me out, guys. I can’t tell you how appreciative I am for you guys doing that. That means so much to me also, make sure to support the podcast, swingtradingthestockmarket.com, you’re going to get all sorts of good market research by going there.

16:45
And if you have any questions please keep sending me the your question, ryan@shareplanner.com. I do read them all and I try to put every one of them and to its own episodes of keep sending them to me. Thank you guys and God bless. Thanks for listening to my podcast. Swing trading the stock market.

17:02
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17:27
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