Courtesy of John Nyaradi
Recent stock market action has brought the major indexes into at least a correction zone, if not an outright new bear market.
If this is a new bear market, how can you dodge another bear bite?
Chart courtesy of www.stockcharts.com
In this chart of the S&P 500, (SPY) you can see how the index has taken a sharp decline since the highs of mid-July.
It is now below its 200 Day Moving Average and 50 Day Moving Averages (red and blue lines) and has broken several long term trend lines.
Furthermore, the 50 Day Moving Average has crossed below the 200 Day Moving average, forming what is widely known as the “death cross” which is a quite reliable statistically proven technical indicator. While not perfect, as no indicator is, the “death cross” has managed to sidestep the biggest part of every recent bear market, while its counterpart, the “golden cross” has captured significant gains during bull markets.
However, it should also be noted that support at the 1120 level has been tested several times and so now the bears will have to push through that level to confirm that we are actually in the beginning days of a new bear market.
It is my opinion that this trading range will not continue for very long and that we’ll see a directional breakout, either up or down, within the next few weeks. Technical and fundamental conditions would indicate that the likely probability of that move would be down.
If that turns out to be the case, as investors and traders, we have several choices if we believe a new bear market is upon us.
The first choice is to “buy and hold” which is the conventional wisdom and which I believe is quite ineffective in today’s volatile markets since the major indexes are still far below where they were in 2000 at the beginning of the “tech wreck” more than 11 years ago.
The second choice is to head for the safety of cash which many investors have done or to head for the safety of Treasury bonds and bills which have also seen a huge influx of funds in recent months and days. This strategy gets you out of harm’s way if the market indeed does continue its downward trajectory.
A third choice is to actually attempt to profit from declining markets and to do that, investors/traders today can use inverse exchange traded funds that move opposite to the action of the underlying index.
There are a wide variety of inverse exchange traded funds that investors can use, however, carefully read and understand the prospectus of the ETF you have in mind because these inverse ETFs do not behave the way that standard exchange traded funds do as they’re priced daily and so longer holding periods might generate tracking errors to the underlying index. Secondly, it’s advisable to have a clear entry and exit plan along with risk management parameters in place in case you’re wrong and the market moves against your position.
A fourth choice for more sophisticated investors is to use put options, either as portfolio insurance on currently held positions or as directional bets in search of profits.
So from the above discussion we can conclude that we are at the very least in a significant correction of an ongoing bull market or either in or close to entering a new bear market. Coming days will tell us which way things will go and confirm this one way or other. Whatever happens, exchange traded funds offer the power and flexibility to seek profits in any market environment.
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