To Short A Stock Or Not, that is the question?
To be able to make money during a stock market correction or pullback requires you to have the ability to understand the market’s key turning points.
Making the decision to not fight the market and instead go with the market is absolutely critical.
Using a mixture of fundamental analysis and technical analysis we can evaluate if a turnaround to the negative side is occurring.
5 Point Checklist to Spot a Bear Market
- Are there serious economic or political events occurring which are not priced into the market?
- Is volatility increasing? Have there been any recent weeks with a great that 5% decline? (see Stock Market Crash Detector System for Further Information)
- Has the market index broken down through it’s short and medium term up-trend support lines?
- Has the market moved into a short-term & medium term down-trend?
- Is the market moving down on increased volume?
If your answer to all of these questions is YES, then it might be time to consider moving your holdings into cash.
This will help you preserve your capital for a later day when the market begins to move upward again.
1 Easy Way To Profit From A Bear Market
There are many strategies one can use:
- You could SHORT a stock (sell a stock and buy it back at a lower price at a later date)
- You could use a PUT strategy on a stock using Options Contracts
However, making money shorting or using options contracts can be more complex and riskier than the following strategy I will show you.
Use A Bear Market Exchange Traded Fund
Exchange Traded Funds (ETF’s) are a simple and effective way to invest in nearly every imaginable market segment, industry, entire indices or even the global stock market.
If you believe the market is going to crash for example, you could simply sell your existing holdings and opt instead for an ETF that does the reverse of what the market does.
Known as Bear Market ETF’s, Short ETF’s, UltraShort ETF’s or Inverse ETF’s these investment vehicles can be traded like stocks, are usually very liquid and normally have very low costs.
Here is an example of the top performing U.S. ETF’s (2011)
This is a list of the ETF’s with the best percentage gains over the last 30 Days. They are also filtered so that ETF’s with a Capitalization less than $200 million are excluded. This filtering helps to ensure that there is enough liquidity in the trades to enable easier entry and exit.
When trading ETF’s you need to understand:
- What the fund is trying to achieve – always read the ETF positioning statement from your broker
- What if any costs there may be with the ETF
- What the Tax implications of the ETF in question might be
- Also, the first item in the list VXX is an ETN (known as an Exchange Traded Note, which has different tax implications to an EFT)
This is not a recommendation to buy a specific ETF it is to show you that they are a usually safe and simple way to go with the market’s direction during difficult times.
On August 4th, 2011, I purchased the ETF RSW the Rydex Inverse 2X S&P500 ETF and realized a 4 day gain of 20% as the market was falling during this period. The 2X inverse means that if the market falls 5% you should realize a gain of 10%.
I hope this helps to provide you with an insight into how you can use ETF’s as the market moves lower.