Use Short Bear Funds to Hedge Crashing Stock Markets

By: Donald_W_Dony

With the introduction of the bear fund, analysts and investors have another very valuable tool to review the markets that was not available before. The use of fundamental analysis can provide investors with an inside look at the financial health of a company, its management skills and spot potential difficulties for the organization in the near future. Technical analysis allows the investor to review large numbers of securities, in different time frames, for profit opportunities, but normally only from one perspective; the buy side. The bear fund offers that mirrored image of a security that when used properly, can greatly expands the investors vantage point and provide valuable data that is not available through simple fundamental reviews or only buy-side technical analysis.

When an analyst will review the S&P 500, many traditional considerations are examined. For example, historical valuations, market breadth, rate of return, etc. Though an examination of the chart would reveal additional important data, an analyst may not see the complete picture. With the S&P 500 Bear ETF (symbol is SH) included in the total review, another viewpoint emerges. In Chart 1, the investor can see that long-term buying volume over the past year is expanding rapidly.

The main trend always goes with the volume. This means that with the increasing buying volume, the security is expected to increase in price. And this is exactly what is developing. The Short S&P 500 ProShares ETF (SH) has finally broken above a year-long resistance level of $63 with a minimum upside target of $69. This piece of data tells the investor that the S&P 500 is actually topping out after five years of upward movement and appropriate action needs to be taken.

Chart 2 of the Short Dow 30 ProShares ETF (symbol is DOG) has a similar picture. The short Dow 30 ETF has had growing volume over the past 12 months and has made a technical breakout at $61.50. After over five years of expansion, the Dow Jones Industrial Average has reached a peak and is beginning a decent.

Without the technical evidence available from the bear funds on these two indexes, a review of the S&P 500 and DJIA could lead the investor to purchase investments on the wrong side of the market.

Bottom line: The five year bull market appears to have come to completion with a peak in October. The downside is expected to continue until the end of the current business cycle in late 2009 or 2010.

Investment approach: There are bear funds now available for many markets and sectors. These securities will advance when the markets decline. Bear ETFs can provide downside hedging for long-term buy side portfolios or can growth.

More information on the present market conditions will be available in the up coming February newsletter. Go to www.technicalspeculator.com

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2008 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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