Three Stocks to Prepare for the Market’s Correction
Nov 11th, 2009 | By David Grandey | Category: Featured, Technical Analysis
With the market pushing through yet another day of gains, most investors are getting nervous. After all, it’s just a matter of time until the market decides to take a turn for the worse. Today, I’ll show you what to watch for, and three stocks that can protect your portfolio in tough times…
The stock market has been running a rally for more than eight months now. Eventually all markets go into corrections. And although I’m not saying it’s going to right now, we are seeing a lot of potential kinks in the armor. In fact the bulk of what we are seeing are short side setups and that tells us something. It tells us to pay attention.
Above is an interesting chart. As you can see, our current market climate is looking strikingly similar to that of the minor correction in June-July.
Notice in the first blue box how the RSI and the full stochastics never really made it over the 50 level? That’s what happens during corrections.
By next week we’ll find out if we retest the highs or we fail. If we fail then it’s time to hit stocks hard on the short side. So why am I getting bearish? Because the chart below tells the story with regards to trends. It’s all about the blue line – that line shows the broad market trend from its July lows…
Volatility is on the rise, so from here on out its going to get real interesting. After all we’ve just ran for 8+ months with only a minor correction.
When an intermediate term correction rears its head it’s a huge moneymaker on the short side. Of course your long-only traditional Wall Streeter won’t tell you when an intermediate term correction is on the way because then you’d take your money out of their fund — they can’t have that now can they?
You need to be prepared so you can not only can get out of your long positions, but can profit from the correction via short-sell exposure or long positions in bearish exchange traded funds (ETFs).
For most investors, the ETF route is the simplest, especially for those without the margin accounts required to directly short stocks. If the market does indeed turn tail, two ETFs that you should consider are:
- ProShares Short S&P 500 ETF (NYSE: SH) – This ETF essentially takes an unleveraged short position in the S&P 500 index. When the markets go down, this fairly liquid fund goes up…
- ProShares UltraShort S&P 500 (NYSE: SDS) – This ETF takes a double short position in the S&P 500. That means that when the S&P 500 goes down 1%, SDS gains 2%. This fund is somewhat more risky than SH because it can move against you quickly and because it exhibits quite a bit of long-term tracking error. That means you shouldn’t hold this fund over the long term.
- ProShares Short Russell 2000 (NYSE: RWM) – This ETF takes a short position against the small-cap Russell 2000 index. While the Russell often moves in similar directions to the S&P 500, its focus on small-cap stocks means that it’s often more volatile.
Keep your eye on the Penny Sleuth to stay updated on where the market’s headed, and when to pull the trigger on your short plays…
Sincerely,
David Grandey
AllAboutTrends.net
November 11, 2009
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Great article,great charts, very helpful until I saw what happened on monday. Your follow to this would be enlightening.
My explanation is simply that the entire stock market is now nothing but a totally rigged game controlled by the government. It does whatever they want it to do. simple as that. No indicators will work in this ‘new normal’ market. The only thing that would offer clues is if one can ‘figure out’ what the next trick in the rigged game will be that the government might play. If you cant figure that out…then all trading and investing is very risky,gambling.
I’m a member of Penny Sleuth and I’m not very satisfied. Spare me the BS and just recommend what to buy and when to sell. It seem all your email is nothing more than trying to get me to to buy something else. I don’t feel you are living up to your advertisements.
I am a recent subscriber and agree with Lawrence so far.
When I get to the end of the email there is usually a little box that reads “subscribe here”.
that is not what I paid my money to receive. I expected recommendations and reasons for buying or selling.
Hey guys, just to clarify, the Penny Sleuth is a free e-letter that’s published every business day. If you paid money to subscribe to a different investment advisory published by Agora Financial and you’re not getting it, please contact customer service at 1-800-708-1020. They should be able to sort things out for you.