Thursday, June 26, 2008

Shorting Stocks Could Be Way to Play This Market

Classification: UNCLASSIFIED

Voltron says: remember my theory about Joe-six-pack pumping money into short ETFs and trashing the market . . .



With the Federal Reserve likely to keep interest rates on hold the rest of this year, many investment pros expect the dollar to remain weak, oil prices to keep rising—and stocks to head even lower.

"It's not going to be a fun summer," says David Rovelli, head of US equity trading for Boston-based Canaccord Adams. "There's low volume, the Fed's not going to do anything because of the election, there's no catalyst and we're just drifting in nowhere land."

The central bank announced Wednesday it was holding its key short-term rate at 2% and gave no hint that it might boost rates soon to ward off growing inflation.

As a result, the dollar is likely to remain lower against foreign currencies, which whets investor appetite for dollar-denominated commodities, specifically oil. Stocks, in turn, aren't expected to rally—even from their current low levels—until the Fed signals a change in interest-rate policy.

So with a moribund market ahead, some investors are changing their strategy: instead of trying to find individual stocks or sectors that might rise in a down market, they're taking advantage of the broader market's trend downwards.

That means shorting the market, or betting on stocks continuing to decline.

"The reality is things go up and things go down, and if we're going to be efficient in making money in the market consistently, we have to take advantage of both," says Ron Ianieri, head of Options University. "There is a time to be short and being short something that is dropping is just as profitable as being long something that is up."

For traditional stock trading, a short sale involves borrowing shares, selling them to a third party, then buying them back at a later date with the hope that they'll be cheaper. Though the rewards can be great, the risk is high.

EFT Plays Less Risky

But short playing has become much easier and less risky with the onslaught of ETFs, or exchange-traded funds, that have flooded the market over the past 10 years. ETFs work much the same way as mutual funds but offer greater trading flexibility and lower costs.

Kathy Boyle, president of Chapin Hill Advisors, has been using ETFs heavily to short the market recently and has realized 20 percent gains over the past few weeks. ProShares is a leader in not only long-play sector-based ETFs but also ones that short the market and offer double the return on downward index movements.

They include the ProShares Ultrashort QQQ (AMEX:QID - News), which rewards a fall in the Nasdaq; Proshares Ultrashort S&P 500 (AMEX:SDS - News), which rewards a fall in the S&P benchmark, and the Proshares Ultrashort Dow 30 (AMEX:DXD - News), which tracks the bluechip industrials.

Rydex recently rolled out eight new ETFs, half of which offer double-inverse plays on the energy, financial, health care and technology sectors. The Rydex Inverse 2x Select Sector Financial (AMEX:RFN - News) was up more than 8 percent in light Thursday trading.

Voltron says: If ETFs are going to cause a crash, you want to be ahead if it.  I.E. short.

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