Bailouts have become the Bermuda triangle for profits. Seemingly mysterious forces draw stocks of all kinds towards new depth. This market action however seems only “mysterious” if you are unaware of economic trends large enough to trump even trillion dollar bailouts.
A giant wave of consumer optimism and enthusiasm fueled by abundant supplies of easy money enticed the average Joe to become Joe the investor. Joe the investor wanted to buy and own stocks, real estate and commodities and live happily ever after from his investment returns.
In 2000, the tech bubble burst. The Technology Select Sector SPDRs (NYSEArca: XLK) and Nasdaq (Nasdaq: QQQQ) lost 41% that year. The bust of the dot.com bubble was partially neutralized by strength in other sectors. Ironically, the Financial Select Sector SPDRs (NYSEArca: XLF) gained 25% in 2000. The real estate bubble (NYSEArca: IYR) was just starting to inflate. In short, there was an equalizing.
The giant wave of consumer optimism has now turned into an equally force of consumer pessimism and despair. Until it ran its course, nothing could stand in the way of the previous bull market. Nothing will stand in the way of this bear market until it runs its course.
In case you are a new reader to our content, this is not a view we’ve just adopted to go with the flow. We’ve warned investors as early as December 2007. Our ETF Profit Strategy Newsletter has kept investors out of harm’s way since Dow 11,500.
In our December newsletter we alerted subscribers of a break to new lows and recommended to use opportunities above Dow 9,000 to sell long positions and add short positions. This window of opportunity was open between January 2nd and January 6th.
Seeing that the Dow has dropped 1,200 points since, you may wonder whether you should just stick it out now. Here are three post bailout strategies that will serve you well for the next several weeks.
Safety
Some herald the high yields of corporate and municipal bonds. The iShares S&P National Municipal Bond ETF (NYSEArca: MUB) and iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) dwarf the yield of 30 year Treasuries. If it sounds too good to be true, it probably is too good to be true. I would stay away from high yield traps (the same is true for financial and real estate ETFs – see related article: Real Estate ETFs – Are Double Digit Yields Worth The Risk?).
At least for now, investors will continue to flock to government issued Treasuries for safety. The iShares Barclays Short Term Treasury ETF (NYSEArca: SHV) offers little volatility with a 2% yield. The iShares Barclays 20+ Year Treasury Bond ETF (NYSEArca: TLT) has a 4% yield in exchange for more volatility.
Short ETFs
Aside from options and other sophisticated trading products and strategies, short ETFs are clearly the easiest and most effective way to profit in a bear market. The key is “in a bear market”. If you use short ETFs, especially double or triple leveraged ones, at the wrong time, they will bite you with vengeance.
We have recorded double and triple digit gains a few months ago, and have been back on the short ETF train since early January.
All together, there are 72 inverse performing ETFs, 52 of which are short equity ETFs. ProShares offers a wide array of short ETFs ranging from single inverse to double inverse and fixed income to equity. Rydex offers similar products at a lower cost but with limited trading volume. Direxion’s trademark are triple leveraged ETFs.
UltraShort ProShares linked to broad market indexes such as the S&P 500 (AMEX: SPY), Dow Jones (AMEX: DIA) or Russell 2000 (NYSEArca: IWM) are the ProShares UltraShort Dow (NYSEArca: DXD), ProShares UltraShort S&P 500 (NYSEArca: SDS) and ProShares UltraShort Russell 2000 (NYSEArca: TWM).
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Below is an excerpt from the ETF Profit Strategy Newsletter – Published on Dec 15, 2008
At the time, the Dow was at 8,565. It reached 9,088 before dropping below 8,000.
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Market Meter
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Short-Term: published on Dec 15, 2008
The Dow should claw its way towards 9,150
Mid-Term: published on Dec 15 2008
Extreme optimism above Dow 9,000 will draw the Dow towards 7,445
Alert on Jan 6: Sell signal! Dow at 9,000 might be the high for 2009
Long-Term: >> Sign up to find out
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How did you do? >> Sign up for the ETF Profit Strategy Newsletter to be a step ahead
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Individual sector bets can increase the potency of short ETFs. ProShares UltraShort Financial (NYSEArca: SKF), ProShares UltraShort Real Estate (NYSEArca: SRS) and ProShares UltraShort Consumer Services (NYSEArca: SCC) come to mind.
Between a “rock and a hard place”
If you believe the recent drop is a mere correction, you may choose defensive sectors such as Consumer Staples Select Sector SPDRs (NYSEArca: XLP) or dividend ETFs with low exposure to financials and real estate, such as the SPDR S&P Dividend ETF (NYSEArca: SDY).
According to our research and analysis, this is no mere correction. We are fortunate (or unfortunate) enough to witness the bear market of a life time. With the emergence of short ETFs, every savvy investor can turn a bear market into a profit center and benefit in an environment where trillions of dollars of wealth simply evaporate.
The ETF Profit Strategy Newsletter has become the “bear market profit headquarters”. We foretold milestones such as Dow 7,500 in advance and recommended to sell above Dow 9,000. Reliable long-term indicators show where the ultimate bottom of this bear will be and how low the markets will drop before the onset of the biggest counter trend rally since October 2007. Detailed target levels are available to subscribers.
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