I’m currently of the view point that the markets look ready to pause or correct over the course of the summer. In some ways I’m expecting a repeat of May 2011-October 2011 and I’ve adjusted my portfolio. As I’ve mentioned previously, the contrarian view is to be long cash, bonds, gold and to be short LatAm and Asian stocks.

CASH – 35%

BONDS – 25%

STOCKS – 15%

GOLD – 10%

SHORT STOCKS – 15%

I plan to alter this strategy in September/October as I expect the rumors of more QE/LTRO to boost the market.

My strategy for shorting the market is to short sell a basket of ETF’s that look particularly weak.

Here are some candidates:

First of all, money managers are all bullish on emerging market stocks. I want to have some short exposure to EEM, EWZ (Brazil) TUR (Turkey) and SCIF (Indian small caps). All three of these emerging market ETF’s were some of the strongest performers in Q1 after being pummeled in 2011. The charts look like they are breaking down.

Secondly, the basic materials appear vulnerable to a downside correction.  One can look at XME (steel), MXI (materials like iron ore and copper), SEA (shipping) for some short sale candidates.  All three of these ETF’s are below their 50 Day and 200 Day moving averages. They have bounced off their lows and it appears that they are experiencing a failing rally.

Finally, I’m interested in shorting U.S. small caps (IWM) and the U.S. financial sector (IAI).  Small caps have been on fire over the last five months but the ETF looks toppy at 80. Hedge fund managers are most bullish on technology and finance right now. The contrarian view is to short these sectors.

It should be noted that only professionals should short sell as the risks are enormous especially in a money printing environment. I’ll use a ten percent stop to keep my losses in check.

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