Play the Bounce to Hedge Your Longs

Includes: DOG, EEV, SDS
by: Faisal Laljee

Okay, so the Dow was up 400 points Tuesday and one might be tempted to forget the feeling of doom and gloom Monday when it fell 778 points. But rest assured, the market has not bottomed. There is plenty of uncertainty, and equity markets are, for the time being, at the mercy of the US government.

I have been investing in equities for over 10 years, and this is one of those few times when I believe absolutely nobody knows which way the market will go tomorrow. If they say they do, they are lying. Unless you can predict what the bail out package will be, and whether it will be approved or not, you cannot bet on the market one way or another.

So what do individual investors do in this environment? Panic selling is not the answer. If it were a different time and place, I would recommend loading up on Apple (NASDAQ:AAPL) at $100 and Google (NASDAQ:GOOG) at $400. I would recommend picking up RIMM at $60, US Steel (NYSE:X) at $70 and AIG under $3. Unfortunately, I can't recommend opening any long positions here, especially since it was an up day for the market and Wednesday may well be another triple digit down day.

So, if you haven't sold some of your longs Tuesday or on the way down these past few weeks, take some off the table. Otherwise, the best way to play this market is to buy some short ETFs. SDS, EEV or DOG are some good plays that are down nicely today after yesterday's huge gains. I would buy those to hedge your portfolio against another big down day. Remember, some pundits are predicting the Dow to fall another 1000-2000 points. If that happens (and I am not saying it will), you will need this hedge.