Bear Market Trading Strategy - Inverse ETF

The Dynamic Wealth Report
February 6, 2008

Put More Money In Your Pocket

Yesterday was a horrible day for the market as recession fears scared away all the buyers. The Institute of Supply Management published a key index showing that non-manufacturing business activity fell sharply. The Dow Jones Industrial Average followed suit, losing 370 points or almost 3%. It was ugly and lots of people were losing money.

I hope you listened to our warning.

Just over two weeks ago, we published “An Important Signal for the Markets.” The 200-day moving average had just turned negative. When this last occurred, we experienced a two-year downturn in the market. We warned of rough times ahead. . . who thought we would be right so quickly?

Looking at the entire market, not a single sector was up. Guess who hurt the worst? That’s right; the financial services industry posted a loss of 4.6%. They were outdone only by the construction & materials industry which lost 4.8%.

Now I hate to say I told you so, but we started warning everyone about both of these industries back in November 2007. I’ll say it again. Stay away from the financial and construction industries for now. I know they are trading at multi-year lows and appear to offer attractive dividend yields, but they are classic value traps. The bad news continues to trickle in, losses are mounting and you won’t make money being early on this trade.

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How can you profit in a bear market?

The key to making money on the long side right now is short-term trades. Don’t kid yourself. We’re in a bear market, and the rallies will be short lived. Positioning your portfolio for a bear market is not difficult. Take a few moments and do it today.

One of the best ways to hedge a portfolio and profit from downside movement is through Inverse ETFs. The Proshares Short S&P 500 (SH) ETF is one of the best. As a matter of fact, you could have purchased this inverse ETF on Friday for $64. On Tuesday it traded for more than $66. That’s a quick 3% on your money in just a few days.

I really like Inverse ETFs. They allow you to “short” the entire market in a single transaction. You don't need a margin account to place the trade. And, unlike open-end mutual funds, you can enter and exit your trades at any time throughout the trading day.

Although Inverse ETFs are relatively new to the markets, they have become widely used. For example, the Proshares Short S&P 500 (SH) was established in June 2006. Average trading volumes, however, are in excess of 563,000 shares a day. This liquidity makes the Bid/Ask spread tighter which helps us minimize our trading costs.

One word of caution. These funds are composed of many underlying stocks. The price tends to fluctuate more than normal at the open and close of the market. Sometimes, these ETFs start trading as much as 15 minutes after the market opens. As a general rule, I suggest placing orders at least an hour after the open or an hour before the close.

Remember, we can make money in a bear market. We just need to be properly positioned. Inverse ETFs are a great way to accomplish this.

• Palladium ($423 per oz)

Palladium jumped over $400 per oz this week reaching new all time highs. Palladium is a precious metal like Platinum. Both are used in jewelry and in catalytic converters.

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Issue Date:
Wednesday, February 6, 2008

• Dollar Thrifty Automotive (DTG) hit a new 52 week low of over $16. The company cut 2007 and 2008 earnings guidance.

• Coca-Cola Femsa (KOF) the Mexican bottler of Coke products hit a new high of over $53. The company has a market capitalization of more than $9 billion.

• Ryder System (R) hit a new high of over $58. The company recently announced higher than expected revenue guidance for 2008.

"The easiest way to go broke is being right too soon."
- Wall Street Saying

Sector		Gain
Platinum/Precious Metals		49%
Home Construction		33%
Transportation Services		26%
Trucking		18%
Airlines		15%

*Last 30 days

Sector		Loss
Consumer Electronics		29%
Heavy Construction		19%
Mobile Telecom		18%
Oil Equipment & Services		15%
Computer Hardware		15%

*Last 30 days

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Wednesday, January 30, 2008