Bear Funds Provide Buying Opportunities in Bull Markets
Many traders avoid short positions. The reasons for this might include the high costs associated with short trades since traders have to pay their broker a variable interest rate on short positions. Traders may not like the theoretically unlimited risk a short position carries. Legal restrictions on some retirement accounts and investment policy restrictions on large accounts might also prevent traders from going short. Bear ETFs allow traders to buy funds that benefit from a market decline just like a short position would. These funds also limit the risk to the amount paid for the fund, the same risk accepted with any long position. With bear funds, there is no reason any trader should ignore the “short side” of the market.
In a market that seems to move relentlessly higher, bear funds can provide profitable trading opportunities. PowerRatings provides a list of inverse ETFs and a number of them have PowerRatings of 8 or higher.
PowerRatings are based on the relative strength or weakness of particular stocks or ETFs. The higher the rating, the greater the one week historical gain has been for stocks and ETFs with that rating. For best results, enter trades on stocks with a PowerRatings of 8 or higher with a limit order 3-7% below the previous day’s closing price. Higher % limit entries have historically shown a greater percentage of winning trades but higher % limit orders also reduce the chance of trade execution.
As an example of the results seen with these signals in the past, buying stocks with a rating of 9 on a 3% pullback the next day and selling five days later has been profitable 75% of the time with an average winner of 4.3%. Other entries and exits also show high winning percentages and large average gains.
Given the recent strength in global stock markets, it is not surprising to see inverse emerging markets funds with high PowerRatings. Emerging markets tend to make large moves up and down. With emerging markets overbought, inverse funds could provide quick gains when a pullback occurs.
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All data is as of the end of day on 4/2/2014.