When was the last time you felt like you were searching for the proverbial needle in the haystack?

Finding opportunities to make money - we call them profit opportunities - has been (at least for many) like searching for the lost needle.

Deceptive “Gains”

Yes, the S&P 500 (SNP: ^GSPC), Dow Jones (DJI: ^DJI), and Nasdaq (Nasdaq: ^IXIC) did surge to new recovery highs. For most investors, unfortunately, this was a recovery of losses more than an actual opportunity to expand their wealth.

Regardless though, stocks have rallied about 40% before giving up some of their gains, so what’s next?

At this time, smart investors have to be either patient or expand their horizon and become flexible.

This doesn’t mean we are unable to identify a high probability profit opportunity. Via the ETF Profit Strategy Newsletter we warned investors of a market top above Dow 9,000, back in December 2008. The Dow (NYSEArca: DIA) hovered above 9,000 from January 2nd to 6th, before it crumbled and shed 30% within three months.

At the time we recommended short ETFs, such as the UltraShort Financial ProShares (NYSEArca: SKF) and UltraShort Real Estate ProShares (NYSEArca: SRS), which gained between 100% -150% over the same 90 day period.

Via the March 2nd Trend Change Alert, we conveyed a shift in gears and recommended to close out short ETFs and buy high octane sector and leveraged ETFs, such as the Financial Select Sector SPDRs (NYSEArca: XLF) and Ultra Financial ProShares (NYSEArca: UYG),  which subsequently rallied between 100% and 200%.

The expected advance of US stocks towards our target of Dow 9,000 has turned us short-term neutral on domestic equities. This in turn has forced us to look for profit opportunities elsewhere.

Before labeling any constellation a profit opportunity, we look for the following characteristics:

1) 3 in 3 trend advantage: Ideally we want the short, mid, and long-term trend (all three) in our favor.
2) Profit potential should outweigh the downside risk by a margin of 5 to 1.
3) We look for a minimum move of 20% in the underlying index. The 20% move can be magnified to 40% or 60%, by using leveraged or leveraged short ETFs.

Profit Opportunity #1:

Contrary to popular opinion, we’ve been bearish on precious metals, in particular silver.

In the June 3rd update we wrote the following concerning gold and silver: “The recent non-confirmation in gold and silver prices along with a rising dollar, have set the stage for gold/silver prices to decline from here. “ Silver (NYSEArca: SLV) has declined ever since, propelling the UltraShort Silver ProShares (NYSEArca: ZSL), our recommended ETF, by nearly 30%.

While investors may choose to short the SPDR Gold Shares (NYSEArca: GLD), or buy the UltraShort Gold ProShares (NYSEArca: GLL), we believe that the downside potential for silver is significantly higher than for gold.

Profit Opportunity #2:

Even though the tentacles of the global bear market have a strangle hold on most country indexes, there are a few (three to be exact) markets that should be able to wrestle their way to, or towards, new highs.

We identified one – India – on April 23rd when the SENSEX broke out of a one year trend channel. Since then, the SENSEX and the iPath MSCI India ETF (NYSEArca: INP) went on to rally as much as 45% before taking a small breather. We expect the trend to continue.

As a word of caution, we recommend to stay away from European stocks as tracked by the Dow Jones Euro STOXX 50 ETF (NYSEArca: FEX). Europe struggles with problems similar to the US which results in similar trading patterns. We will explain our outlook on US stocks in just a moment.

Profit Opportunity #3:

The third profit opportunity is not imminent, but it’s so big it’s worth waiting for.

To understand this opportunity we have to put the recent rally in perspective. On November 15th, 2008, the ETF Profit Strategy Newsletter foretold the following: “Once a temporary bottom (later on identified to be below 6,700) is found, the stock markets will rally into Q1/Q2 of 2009. No doubt, the markets main trend is down.”

New bull markets climb a wall of worry; they don’t ascend an escalator of hope. For this very reason, the recent surge in optimism is worrisome. In fact, the resurgence of optimism is a sign that this rally is nearing its point of exhaustion.

An analysis of reliable long-term indicators with a track record of historic accuracy points towards lower prices ahead, much lower.

During the bear market bottoms of 1921, 1932, 1949 and 1982, P/E ratios and dividend yields always dropped to levels indicative of a true bottom. Rock bottom P/E ratios and dividend yields showed that valuations had reached a level consistent with the economic environment. This capitulation to fair values has not occurred yet and, according to historic indicators, is years away.

Without reaching fair value first, stocks simply cannot stage a sustainable rally; just as a car won’t be able to drive for hundreds of miles unless the gas tank gets filled up.

Clearly, the next opportunity for investors will be to short (profit when prices go down) major indexes like the S&P 500 (NYSEArca: SPY). How low can stock prices go?

The March and June issues of the ETF Profit Strategy Newsletter included a detailed long-term analysis of four long-term indicators (we call them the “Four Horsemen”), along with a target range for the top of this rally and the ultimate market bottom. Benefit now by understanding the big profit opportunities, so you can stop looking for the needle in a haystack.