by John Nyaradi

Last week, many observers of global stock markets were surprised to see global stock markets and European investors react with a wave of bullishness after Eurostat reported that the eurozone was stuck in recession for a sixth consecutive quarter, because its GDP contracted by 0.2 percent during the first quarter of 2013, despite expectations for a less-significant drop to negative 0.1 percent.

Belief that the report would motivate the European Central Bank to step-up its efforts toward stimulating the European economy sent investors on a buying spree. The first-quarter GDP for the 27-nation European Union contracted by 0.1 percent, which – after fourth quarter 2012 GDP contracted by 0.5 percent – brought the EU into recession with the eurozone. European investors were apparently mindful of the often-repeated reassurances from Super Mario Draghi that the ECB remains "ready to act again" if eurozone economic conditions deteriorate beyond

1965 to 1967
1969 to 1971
1981 to 1984
1998 to 2000
2010 to 2012

Since 1950, these are the ONLY years where the S&P 500 (SPY) finished the month of May with a loss for at least three years in a row. Only once in this time period did the S&P 500 fall in May for 4 straight years: 1981 to 1984. Ironically enough, that string occurred at the beginning of the last great secular bull market. With the last three years delivering negative May performances, two with large, gut-wrenching losses (-8.2% in 2010 and -6.3% in 2012), it is no wonder that May, 2013 can generate a lot of fear…even if the odds do not support such fear. In fact, the losses of the last three years are particularly unusual given the last bull market (2003-2007) only delivered one negative May and the bull

Think the market's going down? There are plenty of ETFs out there that let you take a bearish position on a wide variety of indexes.

For example, you could buy shares of the S&P 500 Short ETF (SH). This ETF tracks the inverse performance of the S&P 500 on a daily basis. If the S&P 500 ETF (SPY) goes down on a specific day, SH goes up by a similar percentage -- and vice versa.

Yet for more than two years now, an alternative has been available -- the Ranger Equity Bear ETF (HDGE). This is an actively managed ETF, so instead of synthetically tracking the inverse performance of SPY, the HDGE ETF is run by real human beings who manage a portfolio of actual short stock positions.

A recent post on HDGE by Lawrence Fuller did a pretty good job explaining how the fund works, its philosophy,

Last month I wrote an article about the merits of using the Ranger Equity Bear ETF (HDGE) as a tool to hedge long equity exposure. This is an actively managed ETF that shorts individual stocks without the use of leverage or derivatives, and the portfolio is completely transparent. What I found intriguing about the management team was that they combine fundamental and technical analysis in managing the portfolio. John Del Vecchio, a CFA and forensic accountant, focuses on identifying companies with deteriorating fundamentals to determine which stocks to short. Brad Lamensdorf employs technical analysis to determine when, and at what price, to short the stocks that John has identified as candidates.

What I believed to be relevant in mid-March was the improvement in the relative strength of the shares of HDGE when compared to the S&P 500 (SPY) and Russell 2000 (IWM). The share price bottomed on February 12

As we have recently been served our first taste of real volatility in months as measured by the iPath S&P 500 Short-Term Volatility Index ETN (VXX) and SPDR Gold Trust (GLD), I find myself looking deeper and deeper into our client's holdings to evaluate and prognosticate any potential weaknesses. Investors concerned with the preservation of their gains, as well as capital would be prudent to engage in the same exercise. With so many market participants "Whistling Dixie" in the current environment, I hold firm to the belief that hope is not a viable investment strategy. A fundamental tenet of our firm is that risk within any investment should be identified and planned for well in advance of any purchases. It's this type of basic understanding that will segue into successful changes to your portfolio down the line. Once you have the risks understood, the next step is developing a plan

The average investor lives in fear of the next big drop, and rightfully so. I don't know anyone who has the luxury of tying up invest capital for the next decade just to have a portfolio at the breakeven point before factoring in inflation.

What can you do about the next bear market to protect yourself?

Go 'All In' During The Drop?

If you believe that the economy will eventually rebound, then a bear market is the time you go all in, leverage, and borrow big for the anticipated bounce after the market bottoms out. But what if the markets never do bounce back? Tell me, how many times have you seen this chart of Japan's economy that went down and stayed there?

(click to enlarge)

If this scenario plays out here, doubling down will just mean double the pain. If you are going to mortgage the house to buy

I have grown increasingly bearish on the US stock market in recent months, despite the Dow Jones Industrials (DIA) achieving new highs and the Standard & Poor's 500 (SPY) coming within 2% of doing so. As an investor and advisor who subscribes to a tactical approach, this simply means that I reduce exposure to the equity asset class in lieu of another that presents what I view to be better risk/reward characteristics, but I still maintain what I define as my core exposure to equities. Core exposure is different for every investor. Core exposure for a trader can mean no exposure at all, whereas core exposure for a long-term investor can be 20, 30 or 50% of a portfolio, depending on tax implications, investment strategy and the composition of portfolio holdings. Regardless, the objective is always the same during periods of market decline-to maintain exposure to individual companies and sectors

It is safe to say that all eyes are on Cyprus this morning as the proposed tax on savings accounts (10% on accounts over 100K euros and 6.75% on accounts below 100K) has brought the European debt crisis back into focus. As usual, the key here is the situation with the banks. First, the banks in Cyprus. Second, the banks in Greece and then the eurozone. And finally, the banks around the globe. Who has lent what to whom? Which banks have exposure to big losses? And won't a tax on bank deposits just mean that savers will take their money and run? And then if other countries decide to adopt this type of tax in order to get help from the eurozone, aren't bank runs a serious possibility? In short, this is what today will be all about.

But since the banks are closed in Cyprus today (and may

In this article, I will be examining recent developments in stocks, and commodities to see what they mean for the stock market. With stocks at or near all-time highs, and commodities at there lowest point of the year, I thought now would be a good time to assess the investment landscape of these two asset classes.

Stocks

Development 1: Lack of Confirmation.

The Dow Jones Industrial Average (DIA) has hit a new all-time high repeatedly over the last week, and the Dow Jones Transports (IYT) is hitting new all-time highs as well, which has confirmed the move according to Dow Theory, which is a good sign for the market. However, to many investors the S&P 500 (SPY) is a more representative gauge of the stock market because of the diversity of stocks compared to the Dow, which only holds thirty stocks, and uses an outdated price weighted methodology. The S&P

In June, 2012, I compared the short-term and long-term performance of the Ranger Equity Bear ETF (HDGE) against ProShares UltraShort S&P500 (SDS). I concluded that SDS was OK for short-term bearish bets but HDGE was better for a sustained hedge over time. Surprisingly, since that time, HDGE and SDS are clocking the same woeful performance. They are down 28 and 31% respectively, while the S&P 500 (SPY) has gained 16% since then.

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HDGE and SDS share the same woeful performance since the S&P 500's last major low in June, 2012

Source: FreeStockCharts.com

The attraction for using HDGE as a hedge is that it does not use leverage, so I find it disappointing that its performance has tracked that of the leveraged SDS. Even worse, during certain stretches, like most of the post-election period, SDS actually outperforms on BOTH the upside and the downside. Of course,

Are the bears coming out of hibernation?

The S&P 500 suffered its first weekly decline of the year, and a slight one at that. Still, it might be a good time to take a look at ETFs that short the market, and an active fund in particular.

For instance, the AdvisorShares Ranger Equity Bear ETF (HDGE), which is an actively managed portfolio that tries to achieve capital appreciation through shorting domestic stocks, has gained 4.6% over the past week after experiencing a 11.2% drop over the last three months during the most recent rally.

The fund managers try to identify companies with low earnings quality or aggressive accounting.

The ETF has 44 component holdings and has a total 93.9% in shorts and a 6.3% position in cash. Top short positions include Goodyear Tire & Rubber Co. (GT) -4.2%, Cliffs Natural Resources (CLF) -3.7%, Vale SA (VALE) -3.6%, Fossil

Yesterday, I watched the stock market fall because some members of the Federal Reserve wanted to end its quantitative easing (QE) program before hitting its target of 6.5% unemployment. The reason some Federal Reserve members want to end QE early was the risks further QE could have on the economy and inflation. If the Federal Reserve removes or slows down QE, I believe the market could be in for a correction. With the stock market sitting near a five-year high, I believe this would be a prudent time to think about the investment landscape and see what investment options make sense for the possible coming correction. In addition to the removal of QE, there are four other reasons I believe the stock market is due for around a 20% correction.

Reason No. 1: The Stock Market Is Addicted to QE

The drop in the stock market occurring because of the

Exchange Traded Concepts, an exchange traded fund service facilitator, has launched a "forensic accounting" fund that selects stocks based on earnings quality.

On Thursday, the Forensic Accounting ETF (FLAG) began trading. John Del Vecchio, CFA, an Index principal and forensic accountant, is behind the Del Vecchio Earnings Quality Index, which was created for the new ETF. FLAG has a 0.85% expense ratio.

Del Vecchio is a co-portfolio manager at AdvisorShares Active Bear ETF (HDGE).

The new ETF will be passively managed, but it will follow the new growing class of rules-based or "intelligent" indexing strategies that mimic actively managed styles.

The Del Vecchio Earnings Quality Index assigns 500 large-cap stocks a grade of A through F based on Del Vecchio's "earnings quality" methodology. The index looks for aggressive revenue recognition, inventory issues, reserve concerns, large changes in operation expenses, large changes in operation income and tax issues.

The Risk Aversion Index (RAI) from Leuthold Group is a chart that just about says it all in terms of central-bank-induced moral hazard. It shows just how severely mispriced risk is. In this environment, clearly the triggers like LTCM/Russia or a Bear-Stearns-like event (for instance Japan) are not hard to imagine. But in the greatest irony of all, the RSI is at the lowest, least-fearful level since the index began in 1980. It appears absolutely zombified. Even with central banks sustaining all the walking-dead candidates, I suspect the next crisis will come "out of the blue" and from some area that is trading at all-time highs.

When risk is ignored and swept under the rug time and again, it gets difficult to view things outside the narrow prism of money printing and government-run interventions. Regardless, there are some interesting clues in the CoT numbers that show the commercials

A record number of exchange traded product ("ETP") closures took place in October. The 30 delistings broke the old record of 24, which sponsors established just one month ago. The year-to-date closure count of 89 (as of October 31) is already a calendar-year record, and at least eight more ETFs will be lights out before the end of the year.

October marks the first time ETP listing counts have declined for three consecutive calendar months. The month ended with 1,439 listings, consisting of 1,234 ETFs and 205 ETNs. This is the lowest month-end quantity in seven months. Based on month-end data, the three-month decline in listings totals 47. Using intra-month data results in a larger decline of 57 with listings hitting an all-time high of 1,490 on August 15 and a post-peak low (so far) of 1,433 on October 19.

New product launches numbered only 13 (11 ETFs

The election season is nearing its end and the candidates are making their last ditch efforts to sway voters. Which means, among other things, that it’s time for another look at how the presidential cycle influences stock prices. The Stock Trader’s Almanac (Wiley, 2013), edited by Jeffrey A. Hirsch and Yale Hirsch and now in its 46th annual edition, is the premiere source of this information.

A spiral-bound hardcover, the almanac includes a calendar section, a directory of trading patterns and databank, and a strategy planning and record section. The calendar section has on facing pages historical data on market performance (verso) and a week’s worth of calendar entries (recto). January’s verso pages, for example, give the month’s vital statistics, January’s first five days as an early warning system, the January barometer (which has had only seven significant errors in 62 years), and the January barometer in graphic form.

Is the stock market showing signs of topping out? John Del Vecchio, co-portfolio manager of the Advisor Shares Active Bear ETF (HDGE) seems to think so.

I interviewed John last week about how his views on the overall market. He and his co-portfolio manager Brad Lamensdorf have been increasing the beta of their fund because they think we're poised for a correction. And it appears that as of Friday, HDGE's cash position was less than 1%.

The Active Bear ETF isn't your usual "inverse-the-market" fund (such as the PowerShares Short (SH) ETF for example). HDGE is an actively managed portfolio of actual short positions. And you can track these positions on a daily basis.

Instead of a passive approach to shorting the entire market, John and Brad take a more tactical approach. They identify stocks they believe will significantly underperform - whether because of low earnings quality, aggressive