Bear Market Investing

So you might think the stock market is going down just like Dennis Gartman, who made the call to short the market yesterday.  There are plenty of ways to invest and make money in a declining stock market.  One relatively simple and easy method is to invest in inverse leveraged ETF's.  

These funds use derivatives to mirror the opposite performance of the underlying stock index and many employ leverage to amplify those returns.  So for example, if the Nasdaq index drops 1%, an inverse unleveraged ETF that tracks that index will go up 1%, but an inverse ETF with 3x leverage will go up 3%.  I pulled a screen of the 10 worst performers year to date, thanks to the ongoing bull market.  These ETF's may be due for a turn-around, if indeed the bear is coming.  


SymbolETF NameYTD1 year3 year5 yearSOXSDirexion Daily Semiconductor Bear 3x Shares-52.81%-40.18%-96.64%-98.86%LABDDirexion Daily S&P Biotech Bear 3x Shares-46.17%-16.77%-94.74%N/ASQQQProShares UltraPro Short QQQ-42.75%-36.87%-87.47%-95.45%FAZDirexion Daily Financial Bear 3X Shares-38.00%-19.38%-78.32%-89.67%SRTYProShares UltraPro Short Russell2000-35.84%-0.14%-76.55%-86.09%TZADirexion Daily Small Cap Bear 3X Shares-35.51%1.45%-76.22%-86.34%SPXSDirexion Daily S&P 500 Bear 3X Shares-34.11%-23.17%-72.83%-86.32%SPXUProShares UltraPro Short S&P 500-34.10%-22.84%-72.20%-85.60%QIDProShares UltraShort QQQ-30.05%-22.87%-72.55%-85.30%SDOWProShares UltraPro Short Dow30-27.96%-21.98%-77.45%-87.61%
One of the most popular ETF's is ProShares UltraPro Short QQQ (SQQQ), which is ranked third on the list with a -42.75% YTD return.  This fund has by far the highest average trading volume of the group at about 30.6 million shares and the second highest total assets at about $945M.  This ETF offers 3x daily short leverage to the NASDAQ-100 Index, making it a powerful tool for investors with a bearish short-term outlook for technology equities. 

Another interesting ETF is the Direxion Daily Semiconductor Bear 3x Shares (SOXS) with a -52.81% YTD return.  This fund has average trading volume of 8 million shares and total assets of $203M.  This ETF offers 3x daily short leverage to the PHLX Semiconductor Index, making it a powerful tool for investors with a bearish short-term outlook for semiconductor equities.

SQQQ and SOXS leverage resets on a daily basis, which results in compounding of returns when held for multiple periods.  These can be powerful tools for sophisticated investors, but should be avoided by those with a low risk tolerance or a buy-and-hold strategy, of course.  

There are other ETF's for shorting Biotech, Financials, Russell 2000, Small Caps, S&P 500 and Dow 30 as well.  If you do plan to invest in these funds, timing is everything.  It's best to get in quickly and set a stop loss sell order, in case the market segment you are shorting rallies, to limit your losses.  You should also set a good exit point to take profits if the market does in fact drop and these funds quickly rise in value. 

As with most of my investing strategy recommendations, I advocate for diversification, so an allocation to a short trading strategy should be limited to a small portion (no more than 5% of your portfolio).  The rest of your portfolio should be well diversified across multiple asset classes.

I hope this helps give you some ideas on how to take advantage of stock market weakness.

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