Making Money Alert
Bear Market Survival Guide, Part III
11/02/2011
The equity markets continue their volatile trading, as one day we bask in the bullish glory of a near 11% October surprise and the next day the market drops nearly 3% on fears that a Greek politician will turn the fate of the global economy over to a referendum. The bizarre flip-flop headlines out of the euro zone over the past week -- first the deal’s a go, then it isn’t -- is wrecking all kinds of havoc on traders. More importantly, it shows us that this market is anything but stable. The volatility also demonstrates that there’s plenty of bearish sentiment out there waiting to pour out of investors’ veins.
It’s during times like these that you need to be prepared for the worst. That’s why despite the big buying we saw last month, I decided to begin this series on surviving the next bear market.
Today, I want you to be prepared to take action in the event that the equity markets begin to crumble. If we look at the chart here of the S&P 500 Index, we see that after a very brief stint above the 200-day moving average, stocks in this broad measure of the domestic market now are well below this key technical level. I think that the stock surge in October can just as easily turn into a big sell-off in November.
Over the past two weeks, we’ve taken a look at the technical, fundamental and psychological reasons why we could be headed for a bear market. This week, we’ll look at the exchange-traded fund (ETF) tools needed to keep the profits coming, even while the bulls are on the run.
As you likely know, I am a big fan of ETFs. One of the reasons why is the flexibility and variety that they provide. If the market is going down, you can take advantage of it with ETFs designed for the moderate risk taker, the more aggressive trader, and even the really über-risk-inclined gambler.
The table below shows some of my favorite ETFs, each of which is intended for bearish investors with different risk profiles. The first category is the single-beta short funds, which move in the opposite direction of a given index. For example, the ProShares Short S&P 500 (SH) is a fund that moves in the opposite direction of the S&P 500. What this means is that if the S&P 500 is down 2%, SH will rise 2%.
The second section is the double-beta short funds. These funds are more suited to the aggressive investor, as they move twice as fast as the single-beta funds. The ProShares UltraShort S&P 500 (SDS) is designed to move twice the inverse of the S&P 500. Put another way, if the S&P 500 is down 2%, SDS will be up 4%. The final category is for those willing to take on the most risk, and they are the triple-beta short funds. The ProShares UltraShort S&P 500 (SPXU) is a fund that is intended to move three times the inverse of the S&P 500. If SPX is down 2%, then SPXU will be up 6%.
If stocks begin to falter, then the ETFs listed here will give you the best chance of making big money. I want you to become familiar with each of these bear-market investment vehicles, as they constitute the wide variety of high-caliber weapons you can use to take down the bear.