Market Health

Navigate a Rocky Stock Market With Inverse ETFs

Buckle up, and prepare for turbulence.

That’s a disclaimer we should repeat every autumn.

Because the most wonderful time of the year isn’t far away… but we often have to work for it.

As they say, it’s darkest before the dawn…

Ride out the storm…

No pain, no gain…

You get the picture.

So I turned to trends and seasonal trading expert Chief Trends Strategist Matthew Carr, who confirmed my observation. He said…

September tends to be a little choppy. Since 2011, the Dow Jones Industrial Average has ended September down five times. Then, we get into the best three-month stretch of the year – October, November and December.

In other words, the coming month might bring investors on a bumpy ride. But this instability is almost always followed by a strong bounce to ring in the new year.

When we look at the performance of the Dow Jones Industrial Average in the month of September (in gray below), that’s exactly what we see…

DOW Jones Industrial Average

The best practice is usually to ride out the volatility.

A standard correction is a loss of around 10%. So if your trailing stops are set up correctly and you follow them religiously, you’ll minimize your losses and protect your profits.

But that doesn’t mean you have to sit on your hands.

There’s an easy way to make the most of this seasonal struggle…

A Healthy Dose of Pessimism

There are certain investments called inverse exchange-traded funds (ETFs). In short, they’re a bet against a group of stocks.

These plays allow investors to profit off the decline of an index or sector without the risk of short selling.

Inverse funds are a great hedge to use during a down market. When the market is at all-time highs, you can pick them up for cheap. And then, when everyone is panic-selling, you can take profits.

If you plan to use inverse ETFs, don’t consider them to be long-term plays.

Predictable Fall Fumbles

The broader market and inverse ETFs – as represented by the ProShares UltraShort Dow30 (NYSE: DXD) – are inversely correlated. As you can see, the September dips in the Dow and rallies in inverse ETFs are short-lived.

Historical market data tells us that the market goes in only one direction in the long term. And that’s up. So it stands to reason that an inverse fund would go in only one direction. And that’s down.

But inverse funds are ideal for short-term trading.

Again, look at the shaded areas of the above chart.

You’ll see that every time the Dow hit a rough spot, the ProShares UltraShort Dow30 saw a spike. Those are moneymaking opportunities.

That’s why it’s helpful to follow market patterns and seasonal trends.

If you know when the market is likely to dip based on historical evidence, then you can load up on a hedge.

That way, you’re profiting on the upside and the downside.

Good investing,

Rebecca

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