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By David Sterman

Beware the "sideways chart." When a specific stock or the entire market stops rising in value and their charts "move sideways," then there is often something else afoot.

The change from a rising market to a flattening market signals that buying forces are losing energy. (After all, more than $1 trillion has gone into U.S. markets in the past few months.) It's also a signal that some investors are starting to take profits by selling.

Though a sideways move signals that current buying and selling pressures are roughly in equilibrium, it's often just a temporary stalemate. In many instances, a sideways market can't hold and eventually morphs into a falling market as selling pressures persist while buying pressures peter out.

I think that's where we stand right now. I remain unconvinced that the recent wave of solid economic data can be sustained. Economic conditions are less bad than six months ago, but they are not good either. The recent rally appears to anticipate continued robust economic gains that I simply don't see. More to the point, it's hard to see how companies can top profit forecasts in the quarters ahead as costs have been pared to the bone already, and profit margins are showing signs of peaking. The exposure to still-troubled Europe is just one more concern.

The recent market run appears to be finally losing steam, and though we're in a sideways market now, the next move is more likely to be down than up. That could spell profit-taking in my $100,000 Real-Money Portfolio. To protect against such a risk, I'm hedging my bets.

My favorite vehicle for shorting the market is usually the ProShares UltraShort S&P 500 (NYSE: SDS). It moves in the opposite direction of the S&P 500 -- at twice the pace. So a 2% drop in the S&P 500 yields a 4% gain for the fund.

But I think small-cap stocks are even more vulnerable than large-cap stocks, simply because they've posted even stronger recent gains. Here's a snapshot of the Russell 3000 Small Cap Index.

The fact that this asset class is up more than 30% in the past five months concerns me. The fact this is now a "sideways chart" concerns me just as much.

As a result, I want a fund that directly targets this index. That's why I'm buying the Direxion Small Cap Bear 3X Shares (NYSE: TZA).

The Downside Protection
Of course, if the market moves even higher, then this investment could cause real pain. So I am putting in a stop-loss at $16 to the trade I mention below.

Upside Triggers
This fund actually moves at three times the pace of the Russell 2000 -- in the opposite direction. I am only expecting a 5% to 10% pullback in this index, which would equate to a 15-30% gain.

Two days after your read this, I will buy roughly 600 shares of this fund, worth about $11,400 at current prices (based on a recent price of $18.95). As mentioned above, I will also put in a stop-loss order at $16 to limit my losses in case I'm wrong.

Your personal view of this current rally should dictate your next move. You may not be convinced that stocks must necessarily consolidate back at lower levels. Yet you still may want to think about at least harvesting any recent strong gainers in your portfolio.

Disclosure: David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

Source: Portfolio Protection