The Best Way to Play a Bear Market

Readers want to know…

Our mailbag filled up last week with readers wanting our take on the latest market action.

Stocks plunged last week. But readers weren’t looking for our commentary on why they dropped so hard or so far. After all, we’ve covered the latest meanderings of Mr. Market a fair bit in recent weeks.

Instead… readers want to know what the heck they should do with their money right now.

They want to know if there’s any way to gain from the pain.

Good news… There is.

And it’s easy to do.

For example, when stocks plunged by close to 3% on Thursday, one ticker we track surged by more than 8%.

In fact, we guarantee that the next time stocks dip… it will rise.

How’s that for taking advantage of a down market?

Magic Funds

For experienced investors, exchange-traded funds (or ETFs, for short) may sound dull and unimpressive. They’re surely not as sexy as buying a hot small cap or a biotech that’s about to break out.

But the gains can be equally impressive. And, best of all, they are a great tool in a rocky market like this one.

They can easily turn big pain into huge gains.

If you’re unfamiliar, ETFs are traded just like stocks. How they differ is that they make it easy to buy a stake in a huge basket of companies with just one ticker.

We can spread our money across the entire S&P 500 – instantly buying fractional shares of every company on the benchmark index – just by grabbing shares of SPY. Or we can get as granular as investing in American’s obesity problem through SLIM, the “obesity ETF.”

But what’s best about ETFs isn’t their breadth or the low cost (both are eye-catching attributes). No, it’s their ability to allow us to easily bet against a sector… or an entire economy.


Going Down?

So-called “inverse” ETFs are designed to move the opposite direction of their underlying assets.

In other words, when the index or industry goes down… the ETF goes up.

By picking the right ETFs, we can uncover the perfect way to play a quick downturn in the market.

With just one ticker, we can target a wide variety of sectors… and we can easily bet against them.

In the example above, we were referring to the Direxion Daily S&P 500 Bear 3X ETF (SPXS).

Through a unique combination of swaps, futures contracts and leverage, this fund moves inversely to the S&P 500. But it doesn’t do it in lockstep. No, as the name implies, it moves three steps for the broad market’s one.

In a strong bull market, that’s bad news. The ETF dipped in nearly a straight line during Wall Street’s strong run last year.

But this ETF is not something to buy and hold. Please don’t do that.

It’s an ETF that should fit into a trading strategy. When stocks are looking to head down… get in.

When they’re flattening out or heading up… get out.

It really is that simple.

What’s great is there are thousands of ETFs just like this one. They let us play a wide variety of industries, sectors and trends.

Just figure out what you want to play… and find the suitable ETF.

 

 

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