How to Get Rich in a Stocks Bear Market

By: Money_Morning

Shah Gilani writes: To most investors, just surviving a bear market is more important than finding the next jet-fueled growth stock.

But I want to let you in on a secret: Rather than just trying to survive, investors can actually thrive in bear markets. In fact, I make a lot more money a lot faster in bear markets than I do in bull markets.

After all, stocks and most other asset classes typically fall faster than they rise, because fear is a much stronger motivator than greed.

So if you're not making money in a market like this one - where prices are falling, even plummeting - you're missing out.

It's time to change that. And I'm going to show you how.

Bear Market Funds
The best way to profit from a bear market is to use exchange-traded funds (ETFs) in conjunction with options.

Let's first look at the ETF component.

There are plenty of inverse ETFs that go up in price when markets go down. And for even more oomph, there are "leveraged" inverse ETFs.

You can use these funds to "short" stocks and commodities, without having to open an options account, or rely on a broker.

But remember to do your homework. Make sure you understand exactly what each ETF you're interested in actually represents. Don't just go by the name. Read each prospectus to learn how the fund's investments are allocated and how it's supposed to perform under various market conditions.

Also be sure to check the bid -and -ask spread to make sure it isn't too wide, and the average daily volume to make sure it isn't too thin. I don't trade any ETFs that trade less than 1 million shares a day, on average.

Another thing to keep in mind is that many ETFs make good short-term trading vehicles, but are bad long-term investments. That's because many ETFs don't track their benchmarks precisely. And if they are leveraged, the tracking error widens considerably over time.

Still, these are very versatile instruments. You can buy them in retirement accounts, they are margined the same way stocks are, they are liquid and tradable all day, and you can put in stop-loss and profit -target orders.

Exploring Your Options
The second way to profit from a bear market is through short selling.

I say that all the time and I'm surprised how many people think it's wrong to short stocks.

Trading to make money in a bear market has nothing to do with what's good for the U.S. economy or for America. It's simply a matter of what's good for your net worth.

The old notion that it's un-American to short stocks comes from Wall Street's institutional elite. They don't want the public shorting stocks. In fact, they don't want the public even selling stocks. Why? Because Wall Street wants buyers lined up to pay for the stocks that it is selling short.

Wall Street pros will also try to convince you that short selling is some complex procedure that's best left to the "professionals."

Well, ignore all that chatter. Short selling isn't hard to do.

Options are also great for playing declining markets for stocks, bonds, commodities and other asset classes. Y ou can easily buy "puts" on different asset-class -based exchange -traded funds . I love buying puts on ETFs that represent entire markets and different asset classes that I think are headed south. It's a terrific way to disperse your risks.

I'm very bearish right now, so in my Capital Wave Forecastnewsletter I've had subscribers buy some puts. For example, we own puts on Chipotle Mexican Grill Inc. (NYSE: CMG), the SPDR S&P 500 ETF (SPY), the iShares FTSE/Xinhua China 25 Index F und (NYSE: FXI), and the SPDR Gold Trust ETF (NYSE: GLD). Not every trade is a winner, but we're sitting on an average gain of 103.5% across these short plays.

The Science of "Shorting'
So how can you tell what to short?

Well, the first thing I look at is the "big picture." That is, what is the overall market doing? What is the trend? Are stocks, commodities, and bonds, going up or down?

It may sound complicated, but identifying a trend is easier than you might think. You don't have to be a scholar to read a chart, or figure out if markets are moving up or down. Just look at the data that's out there and use your instincts and common sense. You are probably more aware that you realize.

Once you have a general sense of what sectors are falling fastest, you can make up your mind about what to "short." I use "short" as a general term (even if I'm not physically shorting) to describe positions I take that make money when things decline.

A good general rule is to only short things that are already going down. Get on a moving train. It's a lot smarter - and a lot more profitable - than trying to anticipate an investment -reversing course.

And don't be afraid to be wrong when you put on a short position. It's no different than putting on a "long" (buy) position. There is always risk. Without risk, there is no reward. The trick is to mitigate your risk.

To that end, you should always have a plan when you use ETFs and options. Have an understanding of how far the position can go in both directions and why it might move up or down.

It's very important not to panic . That's why you should always have a stop -loss level in mind, even if you don't actually place a stop-loss order with your broker or on your trading platform. You also should have profit targets in mind.

Don't be greedy when you're shorting. Rarely do short targets run all the way down to zero, so take your profits as soon as you reach your chosen target.

The bottom line: Taking timely and targeted short positions during a bear market can accumulate a lot of capital in a relatively quick period of time - whereas sitting the sidelines gets you nothing. Then, when you feel it's safe to get back in and buy again, you'll have a lot more cash available to ride the next bull market to the moon.

[Editor's Note: If you're interested in hearing more from former hedge-fund manager and Money Morning Capital Waves Strategist Shah Gilani, then you're in luck. Later this week we will be introducing a new, free newsletter that centers entirely around Gilani's expertise: Wall Street Insights and Indictments. Keep an eye out for details later this week.]

Source : http://moneymorning.com/2011/10/04/guide-to-getting-rich-in-bear-market/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.