The Shorts Pile on the S&P 500

On its face, the Dow Jones 4.4% drop in August does not look particularly bad.
After all, a typical correction is 10%. Yet the month was harrowing, as the
volatility spiked. Keep in mind that the average daily move was nearly 2%. While
such swings are great for savvy traders, it can be extremely tough for
longer-term investors. In fact, even the pros had difficulties in August. For
example, hedge fund managers like Steven Cohen and David Einhorn posted losses.
However, John Paulson was the most notable loser as his flagship fund plunged
35%. He had heavy exposure to stocks like Bank of America (NYSE: BAC ) and
Citigroup (NYSE: C ). Yet there were some investors who were able to find ways
to make money, such as Carl Icahn, Kenneth Griffin and Ray Dalio. They were
savvy with safe havens like the SPDR Gold Trust (NYSE: GLD ), as well as
currency plays. But there is something else that worked: short selling. For
example, Icahn scored $100 million by shorting the S&P 500. True, short selling
can be risky. This is especially the case when going after high-fliers like
Chipotle Mexican Grill (NYSE: CMG ) and Lululemon Athletica (NASDAQ: LULU ). But
when done as a part of diversified portfolio, short selling actually can help to
reduce risk. Essentially, you are setting up a hedge. Interestingly enough, the
short interest in the S&P 500 has reached the highest levels in about nine
months coming to 3.03% of the overall market value, according to a recent
report from Bloomberg . No doubt, there are many reasons to be bearish. The
global economy is slowing down, and the U.S. and Europe have sovereign debt
problems. If anything, the surge in gold prices is a stark reminder that
investors are skittish. So, should you short the S&P? It's incredibly
difficult to time the markets. But so long as the volatility continues, it
probably is a good idea to have some short exposure. As I've mentioned in a
recent piece for InvestorPlace.com, there are some good options to look at, such
as the ProShares Short S&P 500 (NYSE: SH ) and the Federated Prudent Bear Fund
(MUTF: BEARX ). And even PIMCO's Bill Gross has a short-oriented fund, which
is called the StocksPLUS TR Short Strategy Fund (MUTF: PSSAX ). Tom Taulli is
the author of various books, including "All About Commodities." He does not
own a position in any of the stocks named here.