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Well it looks like we are riding a hangover from all of the Thanksgiving celebrations. The Market has now pieced together two losing sessions with some heavy selling pressure. Multiple sources of negativity still await. Could the end of the great 5 plus year bull market be on the horizon? I don't know if a bear market approaches, but I do see a 6% to 10% pull back in the S&P 500 SPDR ETF (NYSEARCA:SPY) and perhaps even more so in the Russell 2000 index (NYSEARCA:IWM). Why do I see this as the case? The Fed is eventually going to pull back and the fear of the taper is going to pressure shares. If taper is actually announced before year end or in January, the market reaction could be ugly. When the inevitable correction begins, there are many approaches investors can take to position accordingly for the market panic that will ensue. While we have had a great bull run in the last few months and the last few years as a whole, the market data simply does not support this market going higher. I am preparing by adding a small position in the Direxion Daily Small Cap Bear 3X Shares (NYSEARCA:TZA).

Unlike volatility ETFs, this fund does not rely on leverage, per se, although it tends to help. Generally, small caps point the way forward for markets. As such, the TZA is my favorite way to invest in a bear market and/or short-term pullback. It is also of the highest risk category, given its leveraged nature. TZA management seeks daily investment results of 300% of the inverse of the price performance of the Russell 2000 Index that tracks small cap stocks. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. TZA actually does not invest in equity securities or stocks. What TZA does is it creates short positions by investing at least 80% of its net assets in financial instruments to provide leveraged and unleveraged exposure to the small cap index and the remainder in money market instruments.

But why will TZA deliver outsized returns in a short period? Where is the bad news going to come from? I alluded to the Fed taper above. In fact, all sources of bad news seem like they will stem, in my opinion, from the US Federal Government. As MKM Partners derivatives strategist Jim Strugger stated:

"A number of emerging risk factors bear watching as potential triggers. There is a two-day FOMC meeting December 15-16 that could again spark tapering concerns"

What else could happen in December? Well we should be mindful that this has been a really good year for many stocks, with the exception of metals and mining, mortgage real estate investment trusts and many select small cap stocks. Why does this matter? Tax selling could be at all time highs this year. With the great run in 2013, I expect gains to be locked in. For those who lost their shirts, I expect there to be a ton of tax loss selling. Both sides of this equation lead to selling pressure, which will pressure markets and should bolster TZA prices. What about into 2014? As we approach the first of January, remember that Obamacare (affordable care act) will go into effect. That is the deadline for individuals to sign up for mandated health insurance. Some fear in the market place could persist as folks scramble to sign up on exchange websites that have been poorly designed and have resulted in many technical bugs. Just over a month from now, we will be back debating the debt ceiling. This is sure to cause more selling pressure as fears return that the market will turn quickly bearish. Positive catalysts? Beyond absolutely stellar earnings reports, I can't think of any at this point. Therefore, I am allocating a portion of my cash to TZA in anticipation of selling. I fully expect, based on these fundamental issues a 5 to 10% pullback from current levels. We are long overdue, and the fundamentals are building for selling pressure.

TZA currently trades at $18.70 at the time of this writing. On average, 12 million shares exchange hands daily. Year to date shares are down over 58%. TZA is a risky play given its 3x leveraged nature. The holdings are rebalanced daily, so it is subject to a concept known as slippage, which leads to share degradation even if the market is stagnant. As such, it is meant to be held for a few weeks to months at most. I believe holding from December 2013 through January 2014 is a good bet as selling pressure is mounting.

Source: Selling Pressure Mounts: Consider Holding TZA Through Year End For Outsized Returns