Wednesday, February 28, 2007

 

How to get short the stock market

First off, the 4th quarter 2006 GDP was revised down as expected. It came in at 2.2% which was a larger than normal revision of down 1.2% . I was confused by the number because it did not fit in with the slowing housing market, weakening manufacturing, and most other indicators save consumer confidence and the stock market. This fits in with the trend of GDP falling for most of 2006 which should lead us into recession latter this year.

Now that the stock market has cracked you might consider hedging your long stock market position. But how? How about an Exchange Traded Fund (ETF) that mimics one of four popular indices. Except these ETFs are double the inverse of the index of your choice. Sounds to good to be true? No it isn't. But first, let me tell you about ETFs and why they are a good vehicle for professional and not so professional investors.

Rather than pretend I know everything about ETFs I will point you to wikipedia. Just understand that ETFs are supposed to have much of the same advantages as own a stock including forgoing capital gains until the ETF is sold, greater liquidity and transparency of prices than say a mutual fund. Limit orders and stop-loss orders are possible with ETFs. In short, it is much more convenient than other methods of shorting like stock index futures and mutual funds.

So let's say you have exposure to the stock market but you don't want to sell stock that you have held for a long time and incur big capital gains. Then what you can do is buy these ETFs:

New York, NY, July 13, 2006—ProShares, together with The American Stock Exchange® (Amex®), today announced the addition of four exchange traded funds (ETFs) to the ProShares lineup. UltraShort ProShares are the first ETFs designed to provide magnified short exposure to well-known market indexes.

The new UltraShort ProShares seek daily investment results that correspond to twice the inverse of those indexes, before fees and expenses. ProShares, which is part of ProFunds Group, introduced its family of innovative ETFs on June 21, 2006, with eight other ETFs offering short or magnified exposure to popular indexes.

They have long, short, and double short the Dow, Nasdaq 100, S&P 500, and Nasdaq MidCap indices. After a four year long bull market, with GDP trending lower, the housing market putting in lower prices with no end in sit, an inverted yield curve since June of 2006, and slowing manufacturing it is hard to think of a better time to hedge against a bear market.


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