With recent chaos in Greece and Spain, uncertainty in Europe and a slowing global economy, investors can only wonder if we will ever see our way clear to profits for 2012.
My thesis is that this volatility we have seen over the last several years is going to continue for a long time to come. It is very likely that we are in the middle of a long term, secular bear market that began in 2000 and could continue for many more years. This bear has been fed by the tech wreck of 2000, the financial collapse of 2008 and most lately by the financial crisis in Europe. Going forward, it will likely find more fresh meat in the debt problems in the United States and the global aging population which will further stress national resources both in the United States and the entire developed world.
Within this secular bear, however, there will be opportunities to make money on both the up and down side of the wild market swings we will likely see. During its 20+ year secular bear, Japan has seen double digit rallies and double digit declines and we are likely to see the same as we go through time. It is relatively easy to make money by going long during the bull market phases, like the one that ran from 2003-2007, but then most of that and more is given back during the downswings like the one that started in 2008. Since March, 2009, we have been in another upswing that could likely be followed by an equally impressive decline if the situation in Europe should get out of hand and the world enters a double dip recession which is becoming a more likely possibility with each passing day.
So if we are at the beginning of a significant downswing, which is a likely possibility, what is an investor to do?
One option is to flee to the safety of cash. Another option is to just ride it out, to buy and hold as we have been taught to do for years, or to dollar cost average and hope that over time we will end up in the black. But there is yet another option, and that is to make money during bear market declines.
To do that, one can use inverse ETFs which come with their own set of pros and cons or we could consider a relatively new ETF that has hit the investing scene with great excitement and seems to have great potential for seeking profits during bear market declines.
To counteract a possible bear bite, investors could look to a relatively new exchange traded fund, Active Bear ETF (HDGE) for a way to profit from any potential oncoming global upheaval or massive market correction.
Active Bear is part of a relatively new class of ETF, those which are actively managed, and this particular one offers short exposure to equity markets through the short sales of domestic securities. It short sells a portfolio of 20-50 liquid U.S. traded equities in an attempt to outperform during market declines and offer a hedging vehicle during normal market conditions. It looks for companies with poor earnings quality, accounting problems or earnings events that could lead to lower share prices and then shorts those stocks.
As an actively managed ETF, it comes with a management fee that will lower overall return. However, it also offers the significant advantage over inverse ETFs of not having the tracking error that is inherent in these products as they are priced on a daily basis and so can compound against you if the underlying index moves against your position.
A quick glance at HDGE shows us that it closely traces an inverse path to major U.S. indexes like the S&P 500. As the S&P goes up, HDGE goes down and vice versa. In recent days we can see that HDGE is in a strong uptrend as the major markets swoon.
Active Bear ETF (HDGE) has grown fast since its inception less than 18 months ago and now sports more than $250 million assets under management as retail and professional investors alike flock to the fund to either hedge current long term positions or make a directional play on the current correction that seems to be unfolding. It seems like it could be a solid bet for investors who are less than optimistic about the future direction of the U.S. stock market or for those who want to hedge current positions they own.
Active Bear offers the potential to protect your portfolio from another unwelcome bear bite and it can also be useful in normal market conditions as it offers a way to hedge equity exposure for buy and hold investors, diversify your portfolio and find companies whose share prices could decline even while the broader indexes are in an uptrend.
Buy and hold investors can use it as a hedge while more active traders can use various technical trading techniques to go long the ETF when market conditions indicate a correction is in store and then exit their positions or even short HDGE when it looks like a new uptrend in major indexes has resumed. So HDGE offers investors a sophisticated vehicle to seek profits and minimize losses in the secular bear market that shows no sign of ending anytime soon.
Disclosure: Wall Street Sector Selector is long HDGE
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John Nyaradi is Publisher of Wall Street Sector Selector, an online newsletter specializing in sector rotation trading using Exchange Traded Funds. John's new book "Super Sectors," which explains how to outsmart the market using sector rotation and ETFs, is available now by clicking here.
All material herein is believed to be correct but its accuracy is not guaranteed. This article represents solely the opinions of John Nyaradi and readers are encouraged to consult their investment advisors prior to making any investment decisions. All information herein is for general informational purposes only. The information is of an impersonal nature and should not be construed as individualized advice or investment recommendations. There is risk of loss in all trading and readers are encouraged to read the full disclosure statement at http://www.wallstreetsectorselector.com/disclosure.html. None of the information in this article is intended to be investment advice or any kind or offer or solicitation to buy, sell or otherwise invest in any fund, company or security. Nothing herein represents a recommendation, claim, promise, guarantee or warranty regarding the suitability or profitability of any investment.