Changing Course to the "Short Side"

Last week our signals went to the "Red Flag Flying" mode which means we anticipate lower prices ahead.  The S&P 500 was down -2.6% for the week and the Dow -3.0% but underlying that activity, there was a major shift to "sell" signals in multiple stocks, ETFs and trend following indicators.

 
These can be quite accurate indications of a trend change when confirmed as they were last week and so I expect the rally to stall here and reverse. 
This Monday at the open, we repositioned our portfolios to the "short" side.
 
How low the market might go is unknown, of course, and nobody can tell you for sure what kind of correction we might have, particularly in today's volatile environment.
 
On the S&P chart below you can see that it calls for a Bearsih Price Objective of 850 and that there is support at 905 and again at 880.  A drop below 880 could easily lead to a more significant drop and breaking the bearish resistance line at 835 could lead to a retest of the March lows.
 
 
 
 chart courtesy of stock charts.com http://www.stockcharts.com
 
Particular weakness is showing up in Banks, Real Estate, and Building and across the world in Emerging Markets, Asia and Europe.
 
The View from 35,000 Feet
 
Last week the Obama Administration put forth some sweeping changes to the financial system including higher capital requirements and less leverage for banks which seems a lot like closing the barn door after the horse has left, but perhaps these proposals could help to avert future financial crises like the one we've just come through.  And are still going through.
 
Three banks failed last week, bringing the year's total to 40 and housing starts were up in May.  This week the market will turn to earnings reports from Oracle, Palm and Micron in the tech sector, Lennar in the homebuilding sector and Bed, Bath and Beyond in the retailing sector.
 
The Federal Open Market Committee meets Tuesday and Wednesay and the Treasury will attempt to sell another $100 Billion in debt this week, a record for two, five and seven year notes.
 
Treasuries put on their best performance in over a month last week as consumer prices dropped -1.3% year over year in May, the biggest drop since 1950.  
 
So far the government has spent $12.8 Trillion of our money on stopping this recession and that adds up to real money as it's close to the entire US GDP for all of last year. 
 
For investors considering how to invest if the market continues to "swoon," here are some factors to consider:

So for investors who want to participate on the “short” side and look for profits if a decline should ensue,  here are a couple of ways to use the flexibility of ETFs to position themselves for any summer swoon that might be coming our way.

 

One of the best ways to position for profits in a down market or correction would be to use inverse ETFs, or ETFs that move opposite to market direction.

 

A leader in inverse Exchange Traded Funds is ProShares, a division of ProFunds Group, a $28 Billion provider of mutual funds and Exchange Traded Funds.  ProShares manages approximately 85% of the short and leveraged fund assets in the United States today.

 

They have more than 60 ETFs that offer short exposure and double exposure in a wide range of investment options including major indexes and major sectors like Oil and Gas, Financials, International and even Treasury Bonds. 

 

And investors can use these funds in all sorts of different ways.  They can gain exposure to directional moves they think might occur and they can also hedge positions in which they hold stock by buying the inverse ETF to hedge a downside move. 

 

ProShares allow investors to “short” the major indexes with ETFs like SH, the Short S&P 500 PowerShares and DOG, the Short Dow Jones 30 Index.

 

And inverse ETFs can also give you the option of “shorting” a particular sector as like SRS, an ETF that tracks the still beleaguered real estate sector.

 

The benefits of these new funds are many, including the ability to “short” the markets inside of IRAs and 401k plans which traditionally don’t allow shorting of stocks.  But the hazards can also be significant as these are highly volatile, fast moving funds that need to be actively managed with effective trading programs. 

 

For more aggressive investors, leveraged ETFs are also available from ProShares which offer 2X leverage on the “short” side, and for really aggressive investors, Direxion Funds offers a family of 3X leveraged ETFs that give enhanced exposure to the downside and potential profits during any market downturn.

 

These are highly volatile instruments and it should be noted that these leveraged products are not meant to be held for long term positions and are suitable for only the most knowledgeable and active traders and investors.

 

Other options that could be considered to protect your assets during any potential downturn are:

 

ü   Moving a portion of their portfolios to cash.  Professional investors and managers routinely move assets to cash when the market heads south. The old adage, “Cash is King,” is particularly valid during bear market melt downs.

 

ü   Using tighter stop loss points to exit profitable positions and take profits home or minimize losses on losers.  If the bear market rally handed you some 30+% gains, tighter stops could be one way to keep some of those if the market turns south.

 

ü   Buying protective put options to hedge long positions and limit losses without selling positions.  Options are a well known and proven method to lock buy “portfolio insurance” and offset potential losses without selling a winning position.

 

ü   Overweighting stocks, ETFs or mutual funds that do well in bear markets.  This is an obvious possibility, and, in fact, many investors have already figured this out.  Gold and silver have long been a safe haven in troubled times, and both of these precious metals are easily accessible through ETFs.  Commodities have been on a tear and again are available through ETFs. Declining dollar funds and inverse bond funds have also recently served investors well. 

 

So if the bear isn’t yet dead and comes back to bite investors around the world, there will still be many opportunities to profit, as there always are, even if the market goes down from here and “green shoots” prove to be more illusive than previously believed.

 

 
The Week Ahead: 
 
Tuesday: May Existing Home Sales, 
 
Wednesday: May Durable Goods Orders, May New Home Sales
 
Thursday: Weekly Jobless Claims, 1st Quarter GDP Final
 
Friday: May Personal Income, May Personal Spending
 
 
Sector Spotlight:
 
Weekly Leaders: T Bonds, Inverse ETFs
 
Weekly Laggards: Energy, Emerging Markets, Industrials
 
Sunday of course was Father's Day and so a belated Happy Father's Day to all of our fathers.  In my view,raising great kids is the best and most important thing that I've ever done or could do.                                   To get a Complimentary Special Report from Wall Street Sector Selector, click here:
 
All the best,
John
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All information presented herein is for general information only and deemed to be from reliable sources, but we cannot guarantee its accuracy. Readers are strongly advised to check with their investment counselors before making any investment. There is risk of loss in all investment activity.





Posted 06-22-2009 5:39 PM by John Nyaradi