Posts

Chips are Back from the Dead

The overwhelming victors of the G20 were the semiconductor companies who have been lumped into the middle of the U.S. and China trade war.

Nothing substantial was agreed at the Osaka event except a small wrinkle allowing American companies to sell certain chips to Huawei on a limited basis for the time being.

As expected, these few words set off an avalanche of risk on sentiment in the broader market along with allowing chip companies to get rid of built-up inventory as the red sea parted.

Tech companies that apply chip stocks to products involved with value added China sales were also rewarded handsomely.

Apple (AAPL) rose almost 4% on this news and many investors believe the market cannot sustain this rally unless Apple isn’t taken along for the ride.

Stepping back and looking at the bigger picture is needed to digest this one-off event.

On one hand, Huawei sales comprise a massive portion of sales, even up to 50% in Nvidia’s case, but on the other hand, it is the heart and soul of China Inc. hellbent on developing One Belt One Road (OBOR) which is its political and economic vehicle to dominate foreign technology using Huawei, infrastructure markets, and foreign sales of its manufactured products.

Ironically enough, Huawei was created because of exactly that – national security.

China anointed it part of the national security apparatus critical to the health and economy of the Chinese communist party and showered it with generous loans starting from the 1980s.

China still needs about 10 years to figure out how to make better chips than the Americans and if this happens, American chip sales will dry up like a puddle in the Saharan desert.

Considering the background of this complicated issue, American chip companies risk being nationalized because they are following the Chinese communist route of applying the national security tag on this vital sector.

Huawei is effectively dumping products on other markets because private companies cannot compete on any price points against entire states.

This was how Huawei scored their first major tech infrastructure contract in Sweden in 2009 even though Sweden has Ericsson in their backyard.

We were all naïve then, to say the least.

Huawei can afford to take the long view with an Amazon-like market share grab strategy because of possessing the largest population in the world, the biggest market, and backed by the state.

Even more tactically critical is this new development crushes the effectiveness of passive investing.

Before the trade war commenced, the low-hanging fruit were the FANGs.

Buying Google, Amazon, Apple, Netflix, and Facebook were great trades until they weren’t.

Things are different now.

Riding on the coattails of an economic recovery from the 2008 housing crisis, this group of companies could do no wrong with our own economy flooded with cheap money from the Fed.

Well, not anymore.

We are entering into a phase where active investors have tremendous opportunities to exploit market inefficiencies.

Get this correct and the world is your oyster.

Get this wrong, like celebrity investors such as John Paulson, who called the 2008 housing crisis, then your hedge fund will convert to a family office and squeeze out the extra profit through safe fixed income bets.

This is another way to say being put out to pasture in the financial world.

My point being, big cap tech isn’t going up in a straight line anymore.

Investors will need to be more tactically cautious shifting between names that are bullish in the period of time they can be bullish while escaping dreadful selloffs that are pertinent in this stage of the late cycle.

In short, as the trade winds blow each way, strategies must pivot on a dime.

Geopolitical events prompted market participants to buy semis on the dips until something materially changes.

This is the trade today but might be gone with one Tweet.

If you want to reduce your beta, then buy the semiconductor chip iShares PHLX Semiconductor ETF (SOXX).

I will double down in saying that no American chip company will ever commit one more incremental cent of capital in mainland China.

That ship has sailed, and the transition will whipsaw markets because of the uncertainty in earnings.

The rerouting of capital expenditure to lesser-known Asian countries will deliver control of business models back to the corporation’s management and that is how free market capitalism likes it.

Furthermore, the lifting of the ban does not include all components, and this could be a maneuver to deliver more face-saving window-dressing for Chairman Xi.

In reality, there is still an effective ban because technically all chip components could be regarded as connected to the national security interests of the U.S.

Bullish traders are chomping at the bit to see how these narrow exemptions on non-sensitive technologies will lead to a greater rapprochement that could include the removal of all new tariffs imposed since last summer.

The risk that more tariffs are levied is also high as well.

I put the odds of removing tariffs at 30% and I wouldn’t be surprised if the administration doubles down on China to claim a foreign policy victory leading up to the 2020 election which could be the catalyst to more tariffs.

It’s difficult to decode if U.S. President Trump’s statements carry any real weight in real time.

The bottom line is the American government now controls the mechanism to when, how, and the volume of chip sales to Huawei and that is a dangerous game for investors to play if you plan on owning chip stocks that sell to Huawei.

Artificial intelligence or 5G applications chips are the most waterlogged and aren’t and will never be on the table for export.

This means that a variety of companies pulled into the dragnet zone are Intel (INTC), Nvidia (NVDA), and Analog Devices (ADI) as companies that will be deemed vital to national security.

These companies all performed admirably in the market following the news, but that could be short lived.

Other major logjams include Broadcom’s future revenue which is in jeopardy because of a heavy reliance on Huawei as a dominant customer for its networking and storage products.

Rounding out the chip sector, other names with short-term bullish price action are Qualcomm (QCOM) up 2.3%, Texas Instruments (TXN) up 2.6%, and Advanced Micro Devices (AMD) up 3.9%.

(AMD) is a stock I told attendees at the Mad Hedge Lake Tahoe conference to buy at $18 and is now above $31.

Xilinix (XLNX) is another integral 5G company in the mix that has their fortunes tied to this Huawei mess.

Investors must take advantage of this short-term détente with a risk on, buy the dip trade in the semi space and be ready to rip the cord on the first scent of blood.

That is the market we have right now.

If you can’t handle this environment when there is blood in the streets, then stay on the sidelines until there is another market sweet spot.

 

July 1, 2019

Mad Hedge Technology Letter
July 1, 2019
Fiat Lux

Featured Trade:

(THE DEATH OF HARDWARE)
(AAPL), (CRM), (NFLX), (HUAWEI)

The Death of Hardware

Apple’s Chief Design Officer Jony Ive, the British industrial designer who made Apple (AAPL) products beautiful, is on his way out.

What else could the man do?

Jonathan Paul Ive was born in Chingford, London in 2967 to a silversmith who lectured at Middlesex Polytechnic.

He pursed automotive design at Newcastle Polytechnic, now named University of Northumbria at Newcastle, and graduated with a BA in industrial design in 1989.

His student successes harvested him the RSA Student Design Award which gifted him a stipend for an exploratory trip to the United States.

Palo Alto, California was his ultimate destination where he befriended various design experts including Robert Brunner—a designer who ran a small consultancy firm that would later join Apple Computers.

Ive signed onto product design agency Roberts Weaver Group following his studies demonstrating his typical attention to detail that he became renowned for.

London startup design agency called Tangerine came calling and Ive used his talents to design microwave ovens, toilets, drills and toothbrushes.

Ive slammed into confict with management at Tangerine who believed his ideas were too modern and exorbitant.

Apple later decided to partner with Tangerine on the basis of some of Ive’s former Silicon Valley friends like Robert Brunner delivering Ive to the forefront of Apple design products where he started hatching his plan to be the ultimate designer at Apple.

The rest is history as Ive went on to produce memorable consumer product designs such as the iMac, iPod, iPhone, and iPad.

His last burst of creativity was applied to produce the Apple Watch which was an overwhelming success.

He will now take his show independent but still collaborate with Apple as his main client.

The new design firm will be called LoveFrom.

This announcement isn’t a shocker and certainly, he really had one foot out of the door ever since the passing of Former Co-Founder Steve Jobs in 2011 put him on less solid footing.

If you remember, Apple had a secret corridor constructed between Jobs’ and Ive’s office epitomizing how closely they collaborated on product development as well as how good of friends they were.

Current CEO of Apple Tim Cook is the exact opposite of what Steve Jobs represented and part of the reason why Apple has lacked that game-changing new product resulting in a reduced share price.

Steve Jobs was a visionary and the person to transform his ideas into physical form was Jony Ive.

You could argue that part of Jony Ive succumbed with Steve Jobs as well as his parabolic career trajectory.

That’s what all those lines of people camping overnight in front of Apple stores was about.

The cult of Apple was at its peak around 2012 where Apple sold the most iPhones and was miles ahead of competition.

Fast forward 7 years and Tim Cook has allowed the relative competition to catch up and even overtake Apple in numerous metrics.

I would argue that Tim Cook was a dependent stop gap to Steve Jobs but the lack of vision in a position where visionaries are rewarded has been Apple’s Achilles heel.

Surely, Apple could have hired an Elon Musk after Tim Cook steadied the rutter.

The results have been monetary success, milking the famed iPhone business for what it’s worth plus more, but missing the boat on premium content.

They could have bought Netflix (NFLX) while it was less potent with the glut of cash in reserve, or they could have penetrated the enterprise business with acquiring Salesforce (CRM) at an earlier stage.

And during this period, Chinese phone makers caught up big time with Huawei now offering a better and cheaper iPhone alternative.

What Jony Ive was leaving the headquarters of Apple represents is the death of hardware.

Out with the old and in the new, and the new is software and the direction Apple is doubling down on.

Apple’s services of iTunes, the App Store, the Mac App Store, Apple Music, Apple Pay, and AppleCare, has become Apple’s “new” business.

Apple’s services segment did sales of $11.5 billion in revenue, up from the $9.9 billion services earned in the second quarter of 2018.

A new all-time record was set for services revenue this quarter.

Apple Pay is available in 30 markets and expect to go live in 40 markets by the end of 2019.

Apple now boasts 390 million paid subscriptions across all of its services, an increase of 30 million sequentially and by 2020, Apple will pass half a million paid subscriptions.

Apple hopes to penetrate further into the magazine business with Apple News+, a $9.99 per month service that offers unlimited access to more than 200 magazines.

Apple plans to surpass $14 billion in services revenue per quarter by 2020.

This is what Apple is doing now and the sad fact is that Ive and his special skills do not fit seamlessly into the main growth drivers of the company anymore.

Software engineers are being cherrypicked left, right, and center as Apple avoids making any big capital investments aside from leasing new buildings to install an army of fresh programmers.

Apple reported $11.45 billion in services revenue topped analysts’ expectations of $11.37 billion.

Apple also reported services margins of 63.8% for the quarter.

Services now accounts for about 20% of Apple’s revenue, up from 16% a year earlier and 13% in the first quarter.

I will give Tim Cook credit for recovering from the 20% drop in Apple’s shares, better late than never.

Now Apple is in the process of shifting up to 30% of their supply chain from China to South East Asia to de-risk from the Middle Kingdom.

 

June 28, 2019

Global Market Comments
June 28, 2019
Fiat Lux

Featured Trade:

(TUESDAY, JULY 2 NEW DELHI, INDIA STRATEGY LUNCHEON)
(TAKE A LEAP INTO LEAPS), (AAPL)
(TESTIMONIAL)

Take a Leap Into Leaps

I am repeating this story because this is the best strategy with which to cash in on the gigantic market swoons, which have become a regular feature of our markets.

Since the advent of the spectacular market volatility, I have been asked one question.

What do you think about LEAPS?

LEAPS, or Long Term Equity Participation Securities, are just a fancy name for a stock option with a maturity of more than one year.

You execute orders for these securities on your options online trading platform, pay options commissions, and endure option like volatility.

Another way of describing LEAPS is that they offer a way to rent stocks instead of buying them, with the prospect of enjoying many years’ worth of stock gains for a fraction of the price.

While these are highly leveraged instruments, you can’t lose any more money than you put into them. Your risk is well defined.

And there are many companies in the market where LEAPS are a very good idea, especially on those gut-wrenching 1,000-point down days.

Interested?

Currently, LEAPS are listed all the way out until June 2021.

However, the further expiration dates will have far less liquidity than near month options, so they are not a great short-term trading vehicle. That is why limit orders in LEAPS, as opposed to market orders, are crucial.

These are really for your buy-and-forget investment portfolio, defined benefit plan, 401k, or IRA.

Because of the long maturities, premiums can be enormous. However, there is more than one way to skin a cat, and the profit opportunities here can be astronomical.

Like all options contracts, a LEAP gives its owner the right to “exercise” the option to buy or sell 100 shares of stock at a set price for a given time.

LEAPS have been around since 1990, and trade on the Chicago Board Options Exchange (CBOE).

To participate, you need an options account with a brokerage house, an easy process that mainly involves acknowledging the risk disclosures that no one ever reads.

If a LEAP expires “out-of-the-money” – when exercising, you can lose all the money that was spent on the premium to buy it. There’s no toughing it out waiting for a recovery, as with actual shares of stock. Poof, and your money is gone.

LEAPS are also offered on exchange-traded funds (ETFs) that track indices like the Standard & Poor’s 500 index (SPY) and the Dow Jones Industrial Average (INDU), so you could bet on up or down moves of the broad market.

Not all stocks have options, and not all stocks with ordinary options also offer LEAPS. Note that a LEAPS owner does not vote proxies or receive dividends because the underlying stock is owned by the seller, or “writer,” of the LEAP contract until the LEAP owner exercises.

Despite the Wild West image of options, LEAPS are actually ideal for the right type of conservative investor.

They offer more margin and more efficient use of capital than traditional broker margin accounts. And you don’t have to pay the usurious interest rates that margin accounts usually charge.

And for a moderate increase in risk, they present outsized profit opportunities.

For the right investor, they are the ideal instrument.

Let me go through some examples to show you their inner beauty.

By now, you should all know what vertical bull call spreads are. If you don’t, then please click here for a quick video tutorial at (you must be logged in to your account).

Let’s go back to February 9, 2018 when the Dow Average plunged to its 23,800 low for the year. I then begged you to buy the Apple (AAPL) June 2018 $130-$140 call spread at $8.10, which most of you did. A month later, that position is worth $9.40, up some 16.04%. Not bad.

Now let’s say that instead of buying a spread four months out, you went for the full year and three months, to June 2019.

That identical (AAPL) $130-$140 would have cost $5.50 on February 9. The spread would be worth $9.40 today, up 70.90%, and worth $10 on June 21, 2019, up 81.81%.

So, by holding a 15 month to expiration position for only a month you get to collect 86.67% of the maximum potential profit of the position.

So, now you know why we leap into LEAPS.

When the meltdown comes, and that could be as soon as today, use this strategy to jump into longer-term positions in the names we have been recommending and you should be able to retire early.
 


 

Time to Leap Into LEAPS

June 21, 2019

Global Market Comments
June 21, 2019
Fiat Lux

Featured Trade:

(MONDAY, JULY 8 VENICE, ITALY STRATEGY LUNCHEON)
(PLAYING THE SHORT SIDE WITH VERTICAL BEAR PUT SPREADS), (TLT)
(WHY TECHNICAL ANALYSIS DOESN’T WORK)
(FB), (AAPL), (AMZN), (GOOG), (MSFT), (VIX)

Why Technical Analysis Doesn’t Work

Santa Claus came early last year as the long-expected Christmas rally started in the wake of the chaotic midterm elections.

We have rocketed back from negative numbers to a feeble 5.7% return for the Dow Average for 2018. By comparison, the Mad Hedge Fund Trader is up a nosebleed 32.82% during the same period.

If you had taken Cunard’s around-the-world cruise three months ago as I recommended, you would be landing in New York about now, wondering what the big deal was. Indexes are nearly unchanged since you departed with the Dow only 3.00% short of an all-time high.

This truly has been the Teflon market. Nothing will stick to it.

In September when the economic data was great, we braced ourselves for a blowout GDP growth rate of 3.5% or better. The market crashed.

In October, global economic growth turned sickly, shares crashed.

Go figure.

It makes you want to throw up your hands in despair and throw your empty beer can at the TV set. All this work and I’m delivered the perfectly wrong conclusions?

Let me point out a few harsh lessons learned from this most recent meltdown and the rip-your-face-off rally that followed.

Remember all those market gurus claiming stocks would rise every day for the rest of the year? They were wrong.

This is why almost every Trade Alert I shot out for the past seven months has been from the long side but only after cataclysmic market selloffs.

We have just moved from a “Sell in May” to a “Buy in November” posture.

The next six months are ones of historical seasonal market strength. Click here for the misty origins of this trend at “If You Sell in May, What to Do in April?”

Most importantly, last year’s “Sell in May” got you out of the best performing sectors of the year at their highs.

Those include big tech including Facebook (FB), Apple (AAPL), Amazon (AMZN), Google (GOOG), and Microsoft (MSFT), all stocks that I was banging the table about during the first half of 2018.

The other lesson learned last summer was the utter uselessness of technical analyses. Usually, these guys are right only 50% of the time. In 2018, they missed the boat entirely.

When the S&P 500 (SPY) was meandering in a narrow nine-point range, and the Volatility Index (VIX) hugged the $11-$15 neighborhood, they said it would continue for the rest of the year.

It didn’t.

When the market finally broke down in October, cutting through imaginary support levels like a hot knife through butter ($26,000? $25,000? $24,500?), they said the market would plunge to $24,000, and possibly as low as $22,000.

It didn’t do that either.

When the end of October rally started, pitiful technical analysts told you to sell into it.

If you did, you lost your shirt. The market just kept going, and going, and going.

This is why technical analysis is utterly useless as an investment strategy. How many hedge funds use a pure technical strategy? Absolutely none, as it doesn’t make any money.

At best, it is just one of 100 tools you need to trade the market effectively. The shorter the time frame, the more accurate it becomes.

On an intraday basis, technical analysis is actually quite useful. But I doubt few of you engage in this hopeless persuasion. 

This is why I advise portfolio managers and financial advisors to use technical analysis as a means of timing order executions, and nothing more.

Most professionals agree with me.

Technical analysis derives from humans’ preference for looking at pictures instead of engaging in abstract mental processes. A picture is worth 1,000 words, and probably a lot more.

This is why technical analysis appeals to so many young people entering the market for the first time. Buy a book for $5 on Amazon and you can become a Master of the Universe.

Who can resist that?

The problem is that high-frequency traders also bought that same book from Amazon a long time ago and have designed algorithms to frustrate every move of the technical analyst.

Sorry to be the buzzkill but that is my take on Technical analysis.

Hope you enjoyed your cruise.

 

 

 

 

June 20, 2019

Global Market Comments
June 20, 2019
Fiat Lux

Featured Trade:
(FRIDAY, JULY 5 CAIRO, EGYPT STRATEGY DINNER)
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD)
(AAPL)
(THE CODER BOOM)

June 19, 2019

Global Market Comments
June 19, 2019
Fiat Lux

Featured Trade:

(TUESDAY, JULY 2 NEW DELHI, INDIA STRATEGY LUNCHEON)
(SHORT SELLING SCHOOL 101),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL),
 (VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)

Short Selling School 101

With the markets recently incredibly volatile, and now that we are solidly into the high risk, low return time of the year, I thought it’s time to review how to make money when prices are falling.

There is nothing worse than closing the barn door after the horses have bolted.

No doubt, you will receive a wealth of short selling and hedging ideas from your other research sources and the media right at the next market bottom.

That is always how it seems to play out.

So I am going to get you out ahead of the curve, putting you through a refresher course on how to best trade falling markets now while stock prices are still rich.

Markets could be down 10% by the time this is all over.

THAT IS MY LINE IN THE SAND!

There is nothing worse than fumbling around in the dark looking for the matches and candles after a storm has knocked the power out.

I’m not saying that you should sell short the market right here. But there will come a time when you will need to do so. Watch my Trade Alerts for the best market timing. So here are the best ways to profit from declining stock prices, broken down by security type:

Bear ETFs

Of course, the granddaddy of them all is the ProShares Short S&P 500 Fund (SH), a non-leveraged bear ETF that is supposed to match the fall in the S&P 500 point for point on the downside. Hence, a 10% decline in the (SPY) is supposed to generate a 10% gain in the (SH).

In actual practice, it doesn’t work out like that. The ITF has to pay management operating fees and expenses which can be substantial. After all, nobody works for free.

There is also the “cost of carry” whereby owners have to pay the price for borrowing and selling short shares. They are also liable for paying the quarterly dividends for the shares they have borrowed, around 2% a year. And then you have to pay the commissions and spread for buying the ETF.

Still, individuals can protect themselves from downside exposure in their core portfolios through buying the (SH) against it (click here for the prospectus). Short selling is not cheap. But it’s better than watching your gains of the past seven years go up in smoke.

Virtually, all equity indexes now have bear ETFs. Some of the favorites include the (PSQ), a short play on the NASDAQ (click here for the prospectus), and the (DOG) which profits from a plunging Dow Average (click here for the prospectus).

My favorite is the (RWM), a short play on the Russell 2000 which falls 1.5X faster than the big cap indexes in bear markets (click here for the prospectus).

Leveraged Bear ETFs

My favorite is the ProShares Ultra Short S&P 500 (SDS), a 2X leveraged ETF (click here for the prospectus). A 10% decline in the (SPY) generates a 20% profit, maybe.

Keep in mind that by shorting double the market, you are liable for double the cost of shorting which can total 5% a year or more. This shows up over time in the tracking error against the underlying index. Therefore, you should date, not marry this ETF, or you might be disappointed.

 

 

3X Leveraged Bear ETF

The 3X bear ETFs, like the UltraPro Short S&P 500 (SPXU), are to be avoided like the plague (click here for the prospectus).

First, you have to be pretty good to cover the 8% cost of carry embedded in this fund. They also reset the amount of index they are short at the end of each day, creating an enormous tracking error.

Eventually, they all go to zero and have to be periodically redenominated to keep from doing so. Dealing spreads can be very wide, further added to costs.

Yes, I know the charts can be tempting. Leave these for the professional hedge fund intraday traders for which they are meant.

Buying Put Options

For a small amount of capital, you can buy a ton of downside protection.  For example, some time ago, I bought (SPY) $182 puts for $4,872 allowed me to sell short $145,600 worth of large-cap stocks at $182 (8 X 100 X $6.09).

Go for distant maturities out several months to minimize time decay and damp down daily price volatility. Your market timing better be good with these because when the market goes against you, put options can go poof and disappear pretty quickly.

That’s why you read this newsletter.

Selling Call Options

One of the lowest risk ways to coin it in a market heading south is to engage in “buy writes.” This involves selling short call options against stocks you already own but may not want to sell for tax or other reasons.

If the market goes sideways, or falls, and the options expire worthless, then the average cost of your shares is effectively lowered. If the shares rise substantially, they get called away but at a higher price so you make more money. Then you just buy them back on the next dip. It is a win-win-win.

 

 

Selling Futures

This is what the pros do as futures contracts trade on countless exchanges around the world for every conceivable stock index or commodity. It is easy to hedge out all of the risk for an entire portfolio of shares by simply selling short futures contracts for a stock index.

For example, let’s say you have a portfolio of predominantly large-cap stocks worth $100,000. If you sell short 1 June 2019 contract for the S&P 500 against it, you will eliminate most of the potential losses for your portfolio in a falling market.

The margin requirement for one contract is only $5,000. However, if you are short the futures and the market rises, then you have a big problem and the losses can prove ruinous.

But most individuals are not set up to trade futures. The educational, financial, and disclosure requirements are beyond mom-and-pop investing for their retirement fund.

Most 401Ks and IRAs don’t permit the inclusion of futures contracts. Only 25% of the readers of this letter trade the futures market. Regulators do whatever they can to keep the uninitiated and untrained away from this instrument.

That said, get the futures markets right, and it is the quickest way to make a fortune, if your market direction is correct.

Buying Volatility

Volatility (VIX) is a mathematical construct derived from how much the S&P 500 moves over the next 30 days. You can gain exposure to it through buying the iPath S&P 500 VIX Short-Term Futures ETN (VXX) or buying call and put options on the (VIX) itself.

If markets fall, volatility rises, and if markets rise, then volatility falls. You can therefore protect a stock portfolio from losses through buying the (VIX).

I have written endlessly about the (VIX) and its implications over the years. For my latest in-depth piece with all the bells and whistles, please read “Buy Flood Insurance With the (VIX)” by clicking here.

 

 

 

Selling Short IPOs

Another way to make money in a down market is to sell short recent initial public offerings. These tend to go down much faster than the main market. That’s because many are held by hot hands known as “flippers” and don’t have a broad institutional shareholder base.

Many of the recent ones don’t make money and are based on an, as yet, unproven business model. These are the ones that take the biggest hits.

Individual IPO stocks can be tough to follow to sell short. But one ETF has done the heavy lifting for you. This is the Renaissance IPO ETF (click here for the prospectus). As you can tell from the chart below, (IPO) was warning that trouble was headed our way since the beginning of March. So far, a 6% drop in the main indexes has generated a 20% fall in (IPO).

 

 

Buying Momentum

This is another mathematical creation based on the number of rising days over falling days. Rising markets bring increasing momentum while falling markets produce falling momentum.

So, selling short momentum produces additional protection during the early stages of a bear market. Blackrock has issued a tailor-made ETF to capture just this kind of move through its iShares MSCI Momentum Factor ETF (MTUM). To learn more, please read the prospectus by clicking here.


Buying Beta

Beta, or the magnitude of share price movements, also declines in down markets. So, selling short beta provides yet another form of indirect insurance. The PowerShares S&P 500 High Beta Portfolio ETF (SPHB) is another niche product that captures this relationship.

The Index is compiled, maintained and calculated by Standard & Poor’s and consists of the 100 stocks from the (SPX) with the highest sensitivity to market movements, or beta, over the past 12 months.

The Fund and the Index are rebalanced and reconstituted quarterly in February, May, August, and November. To learn more, read the prospectus by clicking here.
 

 

Buying Bearish Hedge Funds

Another subsector that does well in plunging markets is publicly listed bearish hedge funds. There are a couple of these that are publicly listed and have already started to move.

One is the Advisor Shares Active Bear ETF (HDGE) (click here for the prospectus). Keep in mind that this is an actively managed fund, not an index or mathematical relationship, so the volatility could be large.

 

Oops, Forgot to Hedge