Experience has shown that many subscribers are like most retail traders in that their trading is limited to buying stock and hoping it will go up in price. As most regular readers know and as anyone who has read "Trade Your Way to Wealth" is aware, I am a believer in playing the direction the market is moving. Roughly 80% of the stocks will be moving in the direction of the market, and if I want an edge, it makes sense to me to try to select candidates that are going in the same direction as the overall market. I don't mean to say that contrarian plays can't work; it just seems less likely to provide the edge we seek if we try to grab from the 20% rather than from the 80%.
It is hardly a secret that the markets have been extremely bearish for some time now and so far the bearishness continues. If we are determined to be bullish players, it seems obvious that a bearish market is a great time to stand aside. We should be aware, however, that there are now many vehicles available that permit us to buy shares that are specifically designed to move up as the markets move down. I often buy positions in the short and ultrashort vehicles provided by ProShares that enable me to profit on downward moves. These devices are closed end funds that seek daily investment results that correspond to the opposite (or inverse) or in the case of ultrashorts, twice the opposite of the daily performance of a market, sector, or index. The ProShares UltraShort Dow30 (DXD), for example, seeks investment results that correspond to twice (200%) the opposite of the Dow Jones Industrial Average Index. These ETFs (Exchange Traded Funds) trade like stock and can be bought and sold throughout the day and can be traded on a technical basis. Many are now available including the ProShares UltraShort S&P500 (SDS) and the ProShares UltraShort QQQ (QID). There also are closed end funds that allow a trader or investor to play sectors to the downside since they are designed to move up in price as the sector moves down. The ProShares Short Oil & Gas (DDG) is just one example.
Traders, as always, should be aware of the risk in taking positions in these vehicles. Some, for example, are thinly traded and may have liquidity issues as a result. For that reason, it is worth checking average daily volume, particularly on the shorts and ultrashorts that are tied to sectors rather than to whole markets. Control of size of potential loss is also critical, as always, and the trader needs to be aware that the ultrashorts while providing the possibility of a return equal to double the opposite of an index, also can lose money at double the move of the index (in other words, really fast) if the index starts to move up. Stops and exit strategies are important here as in all trading.
The point here is that there are ways other than shorting a stock or buying a put that a trader or investor can profit from a downward move in a market or a sector. As is always the case, the trader and investor needs to gain education and practice before putting money at risk.
On another subject, in order to make sure I have notified all my personal coaching students, I am having a free event for them in Scottsdale March 21st and 22nd where I'll do a full day presentation on the 21st on volatility trading and dinner will be on me. On the 22nd, we'll have a laid-back time where everyone can exchange ideas and the students can get to know one another. If you haven't already contacted me, please make sure to let me know whether you are coming or not. I am hoping to make this an annual event. Those who are interested in individual coaching sessions can contact my office at 480-248-9996. I am still offering a subscriber special for a one day one-on-one session for $2,500 ($2,100 for paid subscribers). There are no openings until April and I do limit the number of students significantly each year. The offer will only be open to those who call before February 15th to schedule a session later in the year.
Finally, I am honored to have been selected as the featured author this month by Better-Trades.com. Check out their website www.better-trades.com where you can see my recent interview and explore some valuable information in their stock reviews and analyst exchange.
by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved
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