A quick look back over the past twelve years gave us some of the biggest roller coaster rides in history. We had the dot com bubble burst in 2000 followed by the 9/11 downturn. The economy was in a shambles.
Not to worry. The schemers in Washington devised a new plan. Let’s inflate the housing market. Word came down to the banks, Freddie Mac and Fannie Mae to loosen the requirements for home mortgages. The thing took on a life of it’s own. Housing prices soared. Greed reined supreme with banks inventing new schemes, (CDSs and CDOs), sending their lending ratios soaring. Then pop, the bubble burst, wiping out about $7 trillion of capital worldwide.
US Federal Reserve chairman, Ben Bernanke, had a plan. If I print money and give it to the banks they will lend it out and jump- start the economy. So they devised QE 1,2 and 3, inflating the Fed’s balance sheet to more that $3 trillion. What Bernanke didn’t plan on is that banks, instead of lending out the money, tightened their lending requirements and used the money to speculate in markets worldwide. Corporations followed suit and now hold cash balances totaling more than $2 trillion.
The money the Fed printed found its way into the hands of large investors who brought the stock market roaring back to new highs in the Dow Jones Averages.
The average consumer who was to benefit from this stimulus was left out in the cold. Prices at the super market and the gas pump have taken practically all of the excess cash from them. With corporations unwilling to spend, job creation is practically at a standstill. The March report showed only 28,000 new non-farm payroll jobs were created.
We come to the realization that probably the ride we’ve enjoyed in the stock market since 2009 may get rather bumpy. It may be time to look as ways to protect your portfolio. One simple way is to simply lighten up and sell some of your stocks. Remember always sell your weak ones, not your top performers.
Another way to take protection is to use inverse ETFs. There are ETFs that sell the stock market short. Selling short means that you sell before you buy. You reverse your normal transaction. You sell a stock first then buy it back later, hopefully at a lower price. These short ETFs do this for you. They will go up when the market goes down.
There are different levels of bearishness you can choose. There are straight short ETFs, 2x short ETS and 3x short ETFs. The 2x moves twice as fast and the 3x three times as fast as the normal short ETF. Here is a partial list:
· Short Nasdaq 100 QQQ (PSQ)
· Ultra Short Nasdaq 100 QQQ (QID) 2x
· Ultra Pro Short Nasdaq 100 QQQ (SQQQ) 3x
· Short Dow Jones (DOG)
· Ultra Short Dow (DXD) 2x
· Ultra Pro Short Dow (SDOW) 3x
· Short S & P 500 (SH)
· Ultra Short S & P 500 (SDS) 2x
· Ultra Pro Short S & P 500 (SPXU) 3x
You can decide what percentage of your portfolio you want to hedge using these ETFs.