How to Make Money When Stocks Fall

“Weakness in the S&P 500 doesn’t mean you have to sell all your stocks and rack up big execution fees. There is a much better way to protect your portfolio from weakness in the market.”

Stocks and the economy are both showing clear signs of weakness right now.

On the economic front, the recent parade of weak data is showing few signs of slowing. In the beginning of April, the jobs report came in well below expectations. Last week China GDP came in below expectations, fueling more concern that the country’s debt-fueled growth is slowing. And earnings season is off to a very slow start, with bellwethers IBM and Intel both missing big.

On the chart, the S&P 500 fell 2% Last week and continues to pull back from its recent run up to 1,593. There was even a dreaded sighting of the Hindenburg Omen last week, the single most bearish indicator for the S&P 500 that preceded the 1987 and 2008 crashes that hasn’t been spotted in almost three years.

In addition, spring and summer are traditionally slower times of the year for the economy that has triggered a pullback in stocks in each of the last three years.

Clearly, there are more than a few reasons to be worried about a further correction in the S&P 500, particularly considering the huge gains we’ve seen in 2013. But that doesn’t mean you have to sell all your stocks and rack up big execution fees. There is a much better way to protect your portfolio from weakness in the market.

The Direxion Daily Small Cap Bear 3X Shares (NYSE: TZA) provides 3X the inverse performance of the Russell 2000, the leading small cap index. So if the Russell falls 4%, this ETF will gain 12%. If the Russell climbs 4%, this ETF will fall 12%. It’s a one-stop strategy to hedge your equity exposure against weakness in the S&P 500.

This is a very popular ETF, with total assets under management of $971 million and average daily volume of 18.5 million. It’s expense ratio of 1% in in line with its category average. One word of caution: TZA is not designed to be held for extended periods of time due to slippage on its exposure to derivatives contracts. But for a short-term hedging strategy, this is an excellent tool. Take a look below at how TZA prose last week while the S&P 500 was trending lower.

TZA

 

 

 

Your Investment Partner,

Mike

ABOUT THE AUTHOR

Michael Vodicka

Michael Vodicka is the president and founder of the Vodicka Group Inc., a licensed investment advisor (Series 65) and a financial journalist.