If you’ve followed me for a long time, you know I’m very against short selling. Making directional bets to the downside is a losing game because the upward bias for risk assets is real. Stocks tend to go up more often that they go down. Sure, there are some investors that make a killing by betting on aggressive declines, but for the most part, all evidence this strategy doesn’t produce long-term success.
Having said that, taking on what’s called a long/short spread trade is interesting in select circumstances.
A long/short spread trade is an advanced trading strategy that involves taking a long position in one security while simultaneously taking a short position in another related security, typically within the same sector or asset class, to exploit the price differential between them. The objective is to profit from the widening or narrowing of the spread — the difference in price — between the two positions.
The key thing with this strategy is that it’s neutralizing market risk by focusing on the relative performance of the paired assets rather than their absolute price movements. It’s not a directional bet. It’s an outperformance bet.
By leveraging the spread, traders can potentially generate returns regardless of broader market directions, making it a popular approach among hedge funds and sophisticated investors seeking to capitalize on market inefficiencies. And it’s one approach where shorting can make sense.
To that end, regional bank stocks have performed roughly the same as tech stocks over the past year. You heard that right. Regional banks and tech have performed the same.
Regional Banks vs. Tech Stocks
This leads me to my idea. Take a long position in regional bank stocks and, on a dollar-for-dollar basis, short tech stocks. It might be bold, but relative performance indicates it is achievable.
If anything, with the narrative so strongly supporting tech stocks and so strongly shunning regional banks, it could be the most interesting trade idea out there right now that is NOT dependent on market direction. This is a trade idea that, one could argue, is a way of expressing a bearish bet on stocks without the risks of a pure directional bet. Why? Because technology has led the market higher.
So, if you’re betting against the market, you’re betting against tech stocks. But if you pair that by being long regional banks, you’re limiting the risk of being wrong.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
