Defensive Strategies for a Bear Market

There is a bear market coming.

We don’t know when it will come, but it will come.  Then the bull will toss everyone off its back and those same folks will get mauled by the bear.  The market is at least 30% overvalued, even taking into account the tax cut.  And a correction is going to take things down significantly.

This view is shared not only by the usual doomsdayers, but also by some quite reputable authorities.

How do you protect yourself against the bear?

For starters, you MUST have a diversified long-term portfolio with many forms of low-volatility, non-correlated investments.

For those who are this aggressive, here are leveraged exchange-traded funds that will turbocharge your returns.  However, be very careful.

The simplest and most straightforward leveraged ETFs move on a bear stock market is the Direxion Daily S&P 500 Bear 3x ETF (NYSEARCA:SPXS).  The way this ETF operates is that it uses debt to leverage up higher returns.  That is why it is called “leveraged.”  With that 3:1 leverage proportion, the SPXS mirrors each dollar of invested capital with two dollars of invested debt. That debt could involve either futures contracts or other derivatives.

There are other leveraged ETFs that aim for this tripled return. The ProShares UltraPro Short S&P 500 ETF (NYSEARCA:SPXU) utilizes thing called swap contracts for leverage. A swap contract is a form of contract between two parties.  One of the parties is usually an investment bank.  In addition, it usually includes a financial security of some kind.

Is 3x leverage too much for you?  No problem, there are several 2x leveraged ETFs out there as well. ProShares UltraShort S&P 500 ETF (NYSE:SDS) doesn’t go for the big triple.  Instead, it is content to double the daily return of the S&P 500 using derivatives and stocks.  Just remember that the daily return you hope for is a negative one.

In addition,  if you truly think we are headed for Armageddon, then buy the ProShares UltraPro Short QQQ (NYSEARCA:SQQQ).  SQQQ will deliver an inverse of 3x the daily return.

Oh, by the way, did I say BE CAREFUL.

Read more.

Related

JOIN THE DISCUSSION