Holding Your Breath and Looking at Short Opportunities

Last week, U.S. and global stock markets has their worst week since August 2011. The Dow Jones fell 5.82%, the S&P 500 tumbled 5.77% and the NASDAQ dropped 6.78%. The MCSI Emerging Markets Index plummeted 7.82%.

You were stopped out of the iShares MSCI Hong Kong (EWH), Avago Technologies Limited (AVGO) and Infoblox (BLOX), each at a loss.

A 2.9% fall in S&P 500 mini futures to a 10-month low during Asian trading hours suggests that your remaining position in the PowerShares S&P 500 BuyWrite ETF (PBP) is likely to be stopped out today at the market open.

Investors are in full-on panic mode and are throwing out the baby with the bathwater. Asian stocks plummeted to three-year lows overnight as a slump in Chinese stocks gathered pace. In addition, fears of a China-led global economic slowdown slammed markets across the globe. Shanghai shares dove 9% overnight to a six-month low, wiping out all of this year’s gains.

Of course, with today’s sophisticated exchange-traded funds (ETFs), there are ways to make money in the stock markets even when they are falling.

One such example is the ProShares Short S&P500 (SH) ETF whose performance corresponds to the inverse (-1x) or -100% of the daily performance of the S&P 500. Put another way, when the S&P 500 falls 2%, this ETF should rise 4%.

If you are a more aggressive trader, leveraged options include the ProShares UltraShort S&P500 ETF (SDS), which tries to reflect the -2x or -200% daily performance of the S&P 500.

If you really like risk, you could go for the Direxion Daily S&P 500 Bear 3x Shares (SPXS), which tracks the -3x or -300% daily performance of the S&P 500, or the ProShares UltraPro Short S&P 500 ETF (SPXU), which also tracks the -300% daily performance of the S&P 500.

The trick is to identify when to enter such positions, as markets can bounce strongly as well.

With your Bull Market Alert portfolio likely fully in cash after you are stopped out of your remaining position, this week I am recommending that you just hold off on putting any of your capital at risk during such uncertain times.

So none of the ETFs mentioned above are formal recommendations for now.

And sharp sell-offs like these offer some of the best buying opportunities on the long side.

Once the dust settles, I’ll be ready to make a new Bull Market Alert recommendation.

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