The market has been manic lately. It is up 100 S&P500 (SPY) points since Oct. 3, 2011, (a week ago). It has been making violent moves up and down for most of August and September. Today ECB President Trichet said that the EU credit crisis has reached “systemic dimension.” He warned that the risk of economic shocks spreading further across the financial sector has increased. He noted that bank funding markets have dried up considerably. He urged the national governments and EU authorities to work together. This certainly sounds dire to me. It sounds eerily reminiscent of the Lehman-induced U.S. credit crisis. It seems likely the markets will react to Trichet in the expected way. If Slovakia approves the EFSF expansion plan Tuesday, the markets may settle down near term. If not, we may be in for another bout of “down.” Cramer has been recommending taking profits for the last few days. A full-scale market panic could possibly ensue. I will hope Slovakia does approve the EFSF expansion on the first vote, but I will not necessarily expect it.
What do you do when the market encounters these sharp down moves? There are a myriad of different short funds. However, if you are planning on a precipitous drop for one day or one week or even more, you may want to avail yourself of the triple short ETFs:
BGZ -- The Direxion Large Cap Bear 3X Shares (Russell 1000) -- 300% of the RIY
MWN -- The Direxion Mid Cap Bear 3X Shares (Russell MidCap Index) -- 300% of the RMC.
TZA -- The Direxion Small Cap Bear 3 X Shares (Russell 2000) -- 300% of the RTY.
ERY -- The Direxion Energy Bear 3X Shares (Russell 1000 Energy) -- 300% of the RGUSEL.
FAZ -- The Direxion Financial Bear 3X Shares (Russell 1000 Financial Services) -- 300% of the RGUSFL.
TYP -- The Direxion Technology Bear 3X Shares (Russell 1000 Technology Index) -- 300% of the RGUSTL.
DPK -- The Direxion Developed Markets Bear 3X Shares (MSCI EAFE Index) -- 300% of the MXEA.
EDZ -- The Direxion Emerging Markets Bear 3X Shares (MSCI Emerging Markets Index) -- 300% of the MXEF.
Since we are currently most worried about a financial crisis, the FAZ seems perhaps the most appropriate choice. However, virtually any of these should yield great results on a big down day or week or more. In my mind they are not really for longer term investing.
Some people try to play the options on these ETFs. I find that the costs of those options both in terms of the price and the spread between bid and ask prices are much too high to make profitability a likely outcome. The actual shares themselves are another matter. They can yield good returns in a short time in violent times. You might even choose to trade them on a daily basis. With the VIX above 30 (and sometimes above 40 recently), the current times would qualify as violent.