Using Contra ETFs to Shield Your Portfolio From Japan's Economic Aftershocks

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 |  Includes: BXDD, DXD, ERY, GLD, GLL, PSLV, QID, ROSA, SDS, SKF, SLV, SMN, SPXS, SPY, SQQQ, TM, TWM, TZA
by: Investment Underground

By Gerry Greer, Lead Editor

The markets have had a big run up. A slow and festering drag has been created by China. On Thursday China had an unexpected hiccup. China’s imports in February rose by almost 20%, while exports rose just under 3%. This combination produced a trade deficit 7.3 billion dollars. This was the first trade deficit China has posted in 6 years.

As China was posting its first trade deficit since a month after President Bush delivered his second inaugural speech, the US was posting a 15% larger trade deficit for January than posted in December. First time jobless claims increased by 26,000 from the previous week to 397,000.The US fiscal deficit is at a new all time monthly high of 222 billion for February compared to the previous high of 220 billion posted a year ago.

Greater spending, fewer jobs, an increasing trade deficit combined with a slowdown in China may not produce a one day pull back in the markets. Then on Friday we had the quake in Japan, the third largest economy in the world. Preliminary economic impact was that the area affected was responsible for about 2% of the nations GDP. Since Friday Toyota (NYSE:TM) and Nissan (NASNY.PK) have closed all plants, Honda (NYSE:HMC), Sony (NYSE:SNE) and Panasonic (PC) have partial shut downs. It is estimated that the Tokyo area is responsible for 40% of the nations GDP.

Purchasing contra ETFs is a method of hedging against holdings and playing against the market. Holdings in stocks that are not producing dividends, or trading at prices that reflect optimistic future earnings should possible be trimmed back. Some profits should be taken off the table while they are still in place. Consider using the proceeds to purchase contra ETFs to protect the remainder of your market exposure.

Below are some contra ETFs and their goals in relation to the market they track. Purchasing the ETFs with a multiplier to the markets can get you a hedge against a greater percentage of your portfolio. If you sense the danger has passed sell the ETF, the cost of the fall is your cost of insurance during turmoil.

Find the ones you are comfortable with, use them in short term situations and you will find yourself heading to them if you see a May sell off happening, even in April.

Symbol

Name

Multiple to Market

Market Covered

SDS

Pro Shares Ultra Short S&P 500 Fund

2X

S&P 500

QID

Pro Shares Ultra Short QQQ Fund

2X

Nasdaq- 100

SKF

Pro Shares Ultra Short Financial Fund

2X

Dow Jones US Financial Index

TZA

Direxion Small Cap Bear 3X

3X

Russell 2000 Index

DXD

Pro Shares Ultra Short Dow 30

2X

Dow Jones Industrial Average

TWM

Pro Shares Ultra Short Russell 2000

2X

Russell 2000 Index

BGZ

Direxion Large Cap Bear 3X

3X

Russell 1000 Index

BXDD

Barclays S&P 500 3X Short

3X

S&P 500

ROSA

iPath Short Extended Russell 1000

3X

Russell 1000 Index

ERY

Direxion Energy Bear

3X

Russell 1000 Energy Index

SMN

Pro Shares Ultra Short Basic Materials

2X

Dow Jones US Basic Materials Index

SQQQ

Pro Shares UltraPro Short Nasdaq-100

3X

Nasdaq-100

HGU.TO

Horizons Betapro Gold Bear

2X

S&P/TSX Global Gold Index

Click to enlarge

Also, consider adding a short position in the SPDR S&P 500 ETF (NYSEARCA:SPY) as a hedge against a downturn. Whether you trade gold (NYSEARCA:GLD), silver (NYSEARCA:SLV), currencies or stocks there are times when a hedge against your position is necessary. Using contra ETFs is a method allowing you to hedge without the expiry risk of purchasing puts or selling calls. Exiting and or altering your position are fast and allow you to respond to volatility in a timely fashion.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLD, GLL, SLV, PSLV, TM, SDS, QID, SKF, TZA, DXD, TWM, BGZ, BXDD, ROSA, ERY, SMN, SQQQ over the next 72 hours.