There's no doubt 2015 was one of the most volatile years in recent history.
But here's the thing… I believe 2016 could be even rougher.
We haven't even seen the sell-off I'm predicting yet; it's likely to make the plunge we saw on Aug. 24, 2015, look like a kiddie ride.
Just as there's nothing solid or healthy underpinning the stock market gains we're seeing now, there will be nothing to catch investors who aren't prepared to trade this volatility – just a long, deep drop.
There's no bottom in sight, but the good news is there's one easy way to trade just about everything the market is likely to throw at you this year.
Here's what we should do…
Make Serious Money When Stocks Go Down
When I'm bearish and want to bet stocks are headed lower, I generally like buying inverse exchange-traded funds (ETFs) based on the major market indexes.
ProShares Short Dow 30 (NYSE Arca: DOG) for the Dow Jones Industrial Average, ProShares Short S&P 500 (NYSE Arca: SH) to short the S&P 500, and ProShares Short QQQ (NYSE Arca: PSQ) to bet the Nasdaq is headed lower.
If I'm extremely bearish, and I believe stocks are going to fall hard today or tomorrow, I'll sometimes buy a leveraged short inverse ETF like the ProShares UltraPro Short S&P 500 (NYSE Arca: SPXU). The UltraPro Short S&P fund is a "3x leveraged" inverse ETF. That means if the S&P 500 goes down 1% today, SPXU would go up 3% today.
But this is important: Leveraged ETFs are only meant as short-term trading vehicles. That's why I said "if I believe stocks are going to fall hard today or tomorrow." Because of the way leveraged ETFs are priced, they're "re-set" every day – they're not good long-term holds.
In a perfect world, if your conviction is right and you buy a leveraged inverse ETF and stocks go down right away, and they keep going down for multiple days in succession, you'll be a very happy camper.
I'm not greedy. If I have a straight run for a few days holding an inverse leveraged ETF, I'd take my profits as soon as I think the sell-off is over.
I wouldn't wait another day, I'd ring the register and be happy. If I own an unleveraged inverse ETF like DOG, SH, or PSQ, I'd probably use a 5% to 10% stop to get out if the markets rallied. If you take small losses, you can get out and figure out where stocks are going and get back in if your timing was off but you think they're going down again.
Now let's look at one of my favorite plays: money…
Here's the Trade for When Gold and Currencies Tank (or Skyrocket)
There are lots of leveraged gold ETFs. Here are some of my favorites. Just remember what I said about holding any leveraged ETF: they're very short-term trading vehicles.
Another way to "leverage" gold on the upside (betting bullion is going higher) is to buy miners. Mining stocks move up a lot faster than gold itself in an up-trending gold market.
Currencies are a little bit different, but it's not hard to trade their moves up or down. Don't forget, you can't just short one currency – all currencies are "priced" in terms of another currency, so they always trade as a "pair."
Join the conversation. Click here to jump to comments…
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.
I have heard this (all) before from Keith. It sounds good and with half-way good timing, "tomorrow" can indeed pay-off as a very good hedge. However, unleveraged inverse ETF's such as "SH" are still poor long term holds, as my experience will prove:
I bought some shares in SH in 2010, the last time the stock market looked doubtful ( Before QE II, that is ). Since then, I have lost about 50% of my money as the stock market rallied up in 2011-2014. Each dip was "short and sweet", so my modest position in SH really did little (lasting) good. I think you need a prolonged downturn or an old fashioned bear market that lasts several years or longer for inverse ETF's to really shine.
**
SEC Proposes Scaling-Back Leveraged ETF's to Max. of 1.5 X
http://www.barrons.com/articles/sec-proposes-new-limits-on-derivative-use-1451108296?mod=BOL_hp_mag
SEC thinks public does not understand the risks of leveraged ETF's. I think they are correct. Not suitable for many.