Making Money Alert
Bombs and Ben -- The Market Reacts
07/20/2006
It's been a wild week in the financial markets since last Wednesday's Alert. We witnessed renewed violence in the Middle East that sent stocks reeling; bringing a wave of fear to Wall Street that knocked the Dow down nearly 400 points in just three days.
But in the market, things have a way of turning around quickly, and that is exactly what's happened today. The Dow was up 200 points midway through Wednesday's session, and the chief reason for the rally was comments from Federal Reserve Chairman Ben Bernanke.
Big Ben told Congress that the economy seems to be moderating, and that inflation remains contained. Wall Street is interpreting Bernanke's testimony as a sign that the Fed is really close to ending its streak of interest rate hikes. We've seen this reaction to a possible ceasing of rate hikes before, and we've also seen the disappointment that ensues when the Fed doesn't act like Wall Street thinks it will.
We'll have to wait a few more weeks to find out if the Fed will actually abstain from another interest rate hike. But in the meantime, I urge all of my Alert readers to not be overzealous by jumping headlong into stocks right now. As we've seen since early May, sellers are still firmly in control of the action. Until the market proves otherwise, my advice is to proceed with extreme caution.
ETF STRATEGIES FOR A BEAR MARKET: PART I -- USING SHORT ETFS
There's no doubt about, this market has been hammered over the past several months. Even the big spike in stocks today is largely a result of frustrated investors who are looking to capitalize on even the slightest hint of positive news after a prolonged downtrend. In my opinion, until we see a sustained period of buying in the market such as we've seen today, the scale is still firmly tipped toward the bears.
Given this market's slant toward sellers, many people are struggling with just how best to manage their money. Well, if you are one of those struggling here with this market, don't worry. In this first of a five-part series, we'll explore using "short" ETFs to collect profits when the market is heading south.
The first key to dealing with a bear market is to have the tools at your disposal that can help you make money when stocks are selling off. That means using short or bear-market ETFs that rise when the value of their underlying indexes fall.
Fortunately, we now have many short ETFs to choose from, and they've been brought to us by ProShares. These short ETFs are designed to move in the opposite direction of their respective indices. For example, the ProShares Short S&P 500 (SH) is designed to move higher when the S&P 500 falls. That means if the S&P 500 index loses 2%, then SH will gain 2%.
For more aggressive investors, ProShares now offers leveraged bear funds, which move twice the inverse of their underlying indices. For example, the ProShares Ultra Short S&P 500 (SDS) is designed to move higher when the S&P 500 index falls -- only at twice the rate! So, if the S&P 500 falls 2%, SDS will gain 4%.
Tools like these can really give investors the ability to profit from adverse market conditions. But the key here is to have the proper strategy in place for using these funds. Because shorting the market can be a very tricky proposition, you have to be on top of the markets literally every hour. You have to set sell points, watch charts, watch volume data, look at macro-economic developments, et cetera.
Yes, there is a lot to investing with bear ETFs, especially the leveraged bear ETFs that can really turn on you fast if you're not careful. But if you have the right advisor helping you navigate through all of this data, the job becomes a whole lot easier.
Right now we are using short ETFs in both our Successful Investing and ETF Trader services. One service is a bit more conservative than the other when employing short funds, but the basic theory behind their use remains the same.
For more on how you can make short ETFs work in your investment portfolio, I invite you to check out both my Successful Investing and ETF Trader services.
Click here to learn more about Successful Investing
Click here to learn more about ETF Trader
WISDOM FROM A FAMILIAL SOURCE
"People can live with lost opportunity easier than they can live with lost money."
-- Dick Fabian
My father wrote this many years ago when he first created the Telephone Switch Newsletter, the predecessor to what is now Successful Investing. After nearly three decades, this principle still holds true. In fact, now more than ever, investors must guard against the possibility of a major downtrend in equities. Your first duty as investors is to manage risk, and right now, this market is rife with risk. So on days like today, when the market is up nearly 200 points, remember that lost opportunity is a lot less painful than lost money.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.