We are all aware of the problems facing Europe and the US. This expectation of bad economic data is in the public domain now and that is when trading/investing becomes tricky. Does one buy saying that the bad news is already priced in and that valuations are therefore cheap or does one sell saying that the actual news can be worse than expected. (After all history shows that analysts/economists are like most humans plagued by various biases. Optimism is one of them. Anchoring is another where the analyst clearly anchors his forecast for the data in the vicinity of the previous numbers)

For a trader like me the answer is relatively simple. I go by the price. I can easily go net short or full short on the market. For eg, if Nifty futures trades below 4988 (Fridays low) I will put back on the short positions that I had cut at 5000. Of course, if the Nifty gaps below this level at the opening itself, I will wait for it to move below the 5 min low to sell.

However, for a fund, even an absolute return fund, the answer is more complicated. It hardly ever pays to be 100% short. One can probably never be more than 100% hedged. Despite that if returns are to be generated then the answer is clearly more complicated than just shorting Nifty. One needs to be able to find stocks to short and stocks that one can buy which will outperform the market. A really complicated process which the hedge fund managers are good at.

The good thing for me is that, I need not go through that process and can continue to make money by simply trading the Nifty. Even as I write this note, the markets have opened. I have gone short 100% of my exposure at 4988. Today being a market holiday in the US, I have a slightly bad feeling about this trade (operators get a get out of jail free card on days like this and there is no data release that can help my short case). However if the Nifty continues to fall and trades below 4950 I will feel more confident about this trade.            

Finally, if Nifty goes above 5045 I will get out of my short position. Most importantly before I finish, you should all read the second page of the 3rd September's Hindustan Times!