If you want to use these funds to go short, you can choose any of three tacks:
- Follow momentum and triple-short the biggest losers, which are now financials and domestic small caps.
- Buy the laggards, such as ProShares UltraShort QQQ and Direxion Emerging Markets Bear 3X Shares , on the theory that what's destroying everything else will catch up with the stronger sectors, too.
- Stick with the middle of the road, Direxion Large Cap Bear 3X Shares . No micromanaging is required; just follow the herd
If you do decide to buy any of these funds, I would recommend the ETFs over the Rydex mutual funds for this reason only: You can place stop-loss orders on the stocklike ETFs, and you can't on the mutual funds. Such an order will trigger a stock sale automatically if it moves too far the wrong way, limiting your loss.
I would place stop-loss orders equal to the amount of their leverage times a 10% move in the underlying index. That is, I would stop the ProShares funds at 20% below the price at which I purchased them and the Direxion funds at 30%. This is to protect me against a sudden sharp rally.
And since such a rally would be far more devastating at triple than double leverage, I personally would eschew the Direxion funds. I would buy ProShares UltraShort S&P500
and put a stop-loss 20% below the price I paid.
I would also make this stop-loss dynamic; that is, if the ETF surged 10% in value, I'd cancel my existing stop-loss and establish another against this higher value. In short, I would watch this position like a hawk.
Personally I wouldn't place this bet. The S&P 500 Index
is down 55% from its peak 17 months ago. Only the 1930-32 bear market was worse, and in 1932 the unemployment rate was 23.6%. As of Friday, it was 8.1%. We haven't passed any
either.
My analysis: Things aren't nearly as bad as they were back then, so this time the market won't go down 86%, as it did then. My bet is that this bear market is running out of steam.