Wednesday, October 26, 2011

How to Short the CAC 40 (French Stock Market)

After an initial sell-off around the world, the market have slightly recovered. However the crisis is far from over. Let's see how we can short the CAC 40 (French Index) and try to time the short.

There are several ETF and funds to short the CAC 40 including:
  • Lyxor Etf Short Cac 40INSHC:PAR (in the US)
  • ELAN FRANCE INDICE BEAR (FR0000400434) (in France)
Let's see how both products fared against the CAC 40.

Lyxor ETF only started its quotation in March 2010. Between that time and today, the CAC 40 lost 17.62% while the ETF gained 1.93% (Source: Google Finance). Not really what we should expect. Bear in mind that this ETF is denominated in US dollar, so the exchange rate should also be taken into account.

ELAN FRANCE INDICE BEAR is older having started in 2002. After 9 years, the CAC 40 gained 3.19% where the mutual fund lost 44.49% (Source: Boursorama). Again not such a good performance, but decay over time is expected for such products. This is even worse if we take dividends into account.

So we should only use those products for relatively short period of time (a few months to 1-2 years) and timing is very critical.

Let's assume a 50% retracement (Fibonacci) of the recent fall.

The top was reached around 4160 (18 February 2011) and the bottom around 2780 (22 September 2011), so a 50% retracement would be around 3470. If we reach this level within1 or 2 months, the RSI-14 could also indicate the CAC 40 is overbought and could be a good starting point to start to short the French stock market.

Shorting (even through via ETF) is quite dangerous in the current environment since politicians always seem to find reasons to stimulate. So I may or may not start a position once the target level is reached.

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