The Easy Trade?

Based on volume in some of the double short ETFs yesterday, it looks like the easy money is to short the stock market and ride that all the way to the bank.  But, before you hit the sell button and run out and buy some of these, let’s examine the market for a minute.  First, we’ve definitely had some technical damage.  The downtrend in the dollar has broken and that has caused many to run for the exits from commodities, stocks, emerging market, etc.  The uptrend since March has broken.  Countries are starting to raise interest rates.  There are some things to be concerned about.  But, I’ve said though on my radio show, there still aren’t signs of a long-term top….yet.  So, whipsaw risk is very high (buying high and selling low).

So, if you want to protect yourself even if it’s for the short-term, selling is always the best hedge.  Nothing will protect you as much as just selling.  But, there’s always tax consequences and other considerations so buying put options is another option (no pun intended).  The third option and one many of you use all the time is to buy an inverse ETF (1, 2, or 3 times the opposite of the market).  I use these all the time and they work.  But, they work better when the direction is smooth in one direction.  With the volatility in the last few days, we’ve had anything but a smooth move in one direction.  SDS & TWM had a great day on Friday and week but remember that if the market continues this seesaw pattern, the protection you think you’re getting will erode.  Use them at your own risk.



2 Responses to “The Easy Trade?”

  1. 1 Patrick Craig October 31, 2009 at 3:45 pm

    Hi Karl, How swift will junk bond ETF’s react to the first sign of rising interest rates? For example, could it decline 5-10% in one day like the stock markets do sometimes? Or will it be more gradual over time?

    Same question for conservative corporate bond ETF’s? Will it be more sensitive or less to an interest rate increase (compared to junk bonds)?

    I don’t own any munis. Per your advice, I’m looking to get out of the above but I’m hooked on good returns. So how do I time the pull out but take advantage of the good returns while they last? When the stock market takes a hit, the junk bonds only go done a tenth of equities.

    Love your show!! Patrick Craig

    • 2 keggerss November 4, 2009 at 6:15 am


      It has more to do with how long the bond is rather than necessarily the type of bond. But, certainly the type of bond is important. I think most bond funds & etfs will be hurt when we see rates rise. I’d use the charts to determine when to get out. Thanks Patrick. I’ll be talking more about this over the next few weeks.

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