After all, this could easily just be a bear market rally. And bull markets rarely begin with a bear market rally and head straight higher.

Beware The Bear Market Trap

It makes sense to hedge against a renewed decline. Here’s why smart investors are doing so using inverse ETFs. Read on to find out what they are, how they work, and why you should consider adding one or two to your portfolio in order to protect it…

ETFs: A Safer, More Effective Way To Short The Market

Just a few years ago, investors who wanted to profit from a market/stock downturn had to borrow shares from their broker to short the asset in question. But today, betting against banks, small-cap stocks, or even entire market averages, is just one convenient ticker symbol away.

You can short the market by using an inverse exchange-traded fund (ETF).

And while I’m generally an investor who subscribes to the fact that stocks ultimately rise and produce solid, long-term gains, there are certain times when using inverse ETFs can be very appealing – particularly in the current market environment.

Exchange Traded Funds: A Brief Overview

Before we talk about the hedging advantages of inverse ETFs, let’s quickly review what ETFs are, and how they work…

• Exchange-traded funds are securities that closely resemble index funds, but are more flexible because you can buy and sell them during the day, just like common stocks.
• ETFs give investors a convenient way to purchase a broad basket of securities in a single transaction, offering the convenience of a stock along with the diversification of a mutual fund.
• From a humble start in the early 1990s, the ETF industry has exploded, particularly over the past several years. There are now over 700 ETFs, with $450 billion in assets.

And the advantages? ETFs boast several major ones over mutual funds and common stocks…

• Better diversification
• More flexibility
• Lower costs
• More liquidity
• Tax efficiency

Going Short The Smart Way With Inverse ETFs

Inverse ETFs (or short ETFs) are designed to move in the opposite direction of an underlying index. That means you profit when the benchmark tanks. The lower the underlying asset goes, the higher these funds advance.

Perfect for a bear market like this one.

Think of inverse ETFs as a type of insurance policy for your portfolio. Investing a modest amount in one of them can be a useful way to hedge against market declines, or protect your profits in certain asset classes.

And when an index or stock heads south (as we’ve seen many do with a vengeance recently), an inverse fund can help soften the blow – and in some cases, even generate enormous profits.

For example, on September 30, 2008, four days before the Dow went below 10,000, I sent a special newsflash to my ETF Authority readers identifying 14 securities that could skyrocket as the market heads south.

*Source: Bloomberg. Total returns from 9/30/08 – 3/5/09

As you can see, most of the inverse ETF have done exactly what they were designed to do in this rough market. And it doesn’t stop there…

Double Your Money with Inverse ETFs

Some ETFs can even return double the inverse of the underlying security. For example, if you buy shares of the ProShares UltraShort S&P 500 (NYSE: SDS) and the S&P 500 declines by 5%, SDS gains 10%. (Keep in mind that these funds compound daily, so if you invest for longer, the returns won’t line up exactly).

So how are these ultra-short funds able to double the inverse performance of indexes? Simple… by using leverage. The math doesn’t always work out exactly, but you can usually expect it to return double the inverse within a reasonable range.

The trade-off, however, is that these funds can be incredibly volatile – and if you’re wrong, you lose twice as much. So only consider going ultra-short if you have the stomach for it.

Why You Haven’t Missed Out on Short ETFs…

You may think you’ve missed the boat on short ETFs… but think again.

With the market coming off depressing lows, the current rally may simply be a “dead cat bounce” (which have been known to soar), as the market attempts to form a new bottom.

With this in mind, you may want to consider adding an inverse fund or two to help smooth out some of this unprecedented market volatility.

Good Investing!

Nathan Slaughter

Source: Inverse ETFs: How To Profit From The Bear Market Trap

There are great wealth-creating opportunities in today’s miserable markets, says Andrew Snyder. Take oil, for example. The black goo is on a slippery slope towards $50 a barrel, and no OPEC production cuts are going to stop this in the short term. Andrew says the UltraShort Oil and Gas ProShares ETF (AMEX:DUG) is the best way to profit from the oil industry’s downturn.

More from Today’s Financial News:

Our good friends at OPEC are up to their same old tricks. Oil prices are dropping so the cartel is meeting later this week to discuss a cut to pumping quotas. It is a last-ditch effort to try to keep crude prices from plummeting all the way to $40.

The cartel is expected to reduce production output by as much as two million barrels per day, which would be considered a major cut. There are even rumors that Russia may reduce its output as well. Remember, there are scores of countries that are now dependent on huge sums of “oil” money to fuel their economy.

If we see prices go much further below today’s levels, we are going to see several countries buckling to their knees. The same nations that gouged us for the past few years are in desperate need of help. I cannot wait to see them shed some tears.

Let ‘em fall

Really, all that OPEC is trying to do this week is change investor sentiment. We all know the organization’s price-fixing scheme has been utterly unsuccessful in the past. Greed, corruption, and a powerful producer force outside of OPEC continue to allow the free market to price a barrel of crude.

But if OPEC can sway investor sentiment, make us think demand is not dropping all that much, and make the world believe oil prices truly deserve to be high, then its mission later this week will be a success.

Fortunately, OPEC does not have the slightest chance of keeping oil prices artificially high. Sure, this week prices may not make the drops we saw over the past few weeks. But the decline will continue. We will see valuations drop all the way down to the $40 range.

I know the world has evolved into a market that demands instant gratification, but oil prices will not plummet $30 overnight. It will take some time. But over the next few months and quarters as we see more examples of a worldwide economic recession, crude demand will slip, supply will increase, and prices will drop.

Last week, I recommended that readers take a short position on oil. That way, as prices fall they can profit. The best way to take advantage of the fall is through an exchange-traded fund (ETF) like the UltraShort Oil and Gas ProShares (AMEX:DUG).

The fund is designed to move inversely to crude prices at a 2-to-1 ratio. In other words, for every percentage point crude prices fall, this ETF will increase in value by two percent. It is a great way to take advantage of the oil industry’s downturn.

Another great aspect of ETFs like this one is the ability to buy and sell options based on it. For savvy options investors, there are all sorts of profit and hedging opportunities.

If you are a Hot Stock Confidential subscriber, do not be surprised if you hear about one of these highly profitable plays in the next two days. Last week, we made 85% gains in just a day on Altria (NYSE:MO). We might just reap some more gains from the oil industry.

Oil prices are going even lower. Take advantage of the situation and put some profits back in your portfolio.

These are some highly volatile times for the energy industry and the market as a whole. Pay attention to what is going on, and you have a shot at some great, wealth-creating investments.

Source: OPEC cuts create fantastic buying opportunity

More from The Smart Profits Report:

“The market is very worried about a severe international economic downturn.” That’s the verdict of commodity strategist David Moore at the Commonwealth Bank of Australia.

He was speaking the day after the Dow endured its second-worst one-day slump in history (733 points), with stocks losing a staggering $1.1 trillion in value. The index has recorded triple-digit movement on 20 of the past 23 days and posted just one positive day this month. The Associated Press says investors have lost $8.3 trillion from 401(k) plans, pension funds, college savings accounts, and other investments.

Sure, September’s consumer price inflation reading came in flat, compared with August. But it doesn’t disguise the fact that U.S. employers are shedding jobs en masse, while retail sales dropped 1.2% in September. On the bright side, though, this has led to oil prices dropping by more than 50% since July’s $147 record high. The black goo currently trades at a 14-month low around $70 a barrel amid speculation that consumption will drop as consumers cut back and a global economic recession takes hold.

While there’s nothing you or I can do about a recession, there are steps we can take to combat the stock market’s nosedive. Let me take you back to my colleague Marc Lichtenfeld’s “Five-Point Bear Plan” that he published here back in August 2007. What was true then is even truer today…

Your Five-Point Bear Plan

1. Sell Short: This is when you sell a stock before you own it and buy it back later. The premise is that you expect to sell high and buy low, in that order. But you need to borrow shares first in order to be able to sell them. And of course, the risk is that a stock can go infinitely higher. Your broker must also approve you before you can sell short.
2. Buy Put Options: You can buy put options on a stock or index that you expect to decline. This gives you the right to sell the asset to the seller of the option at a specific price in a pre-specified time. To do so, you must buy a certain number of options contracts – with 100 underlying shares equivalent to one contract. For example, if you think that American Express (NYSE: AXP) is going to decline, you can buy the November $20 puts. This gives you the right to sell the stock at $20 anytime before the third Friday in November, no matter where the stock is trading. If the stock heads lower, your put options should increase in value. Conversely, if the stock is trading above $20, your put expires worthless.
3. Sell Call Options: If you own shares that you don’t want to sell, but think the price may fall, you can sell call options against them. This gives the buyer the right to “call away” your shares at a specific price. Let’s say you own shares of Apple (Nasdaq: AAPL). You can sell the January $90 calls for $19, meaning the buyer has the right to buy your shares for $90 any time before the third Friday in January. No matter if AAPL is trading at $100 at that time, you’ll still be forced to sell at $90. However, if the stock is below $90, the option expires worthless and you keep the $19. You must be approved to trade options if you want to do this.
4. Bear Mutual Funds: There are several mutual funds that seek to profit when markets go down. They include the Prudent Bear Fund (BEARX), ProFunds Bear (BRPIX) and Rydex Inverse S&P 500 Strategy (RYURX). Be sure to read their prospectuses and holdings carefully before you take a position. You’ll also be required to invest a minimum amount and pay annual maintenance fees.
5. Bear ETFs: If you don’t want to short stocks or indexes, don’t have approval to trade options, or don’t want to pay the higher fees associated with funds, you can buy ETFs (Exchange-Traded Funds) that short various indexes instead. For example, the Short QQQ ProShares (AMEX: PSQ) seeks returns that correspond to the inverse of the Nasdaq 100. In other words, if the Nasdaq 100 declines 10%, PSQ should be up roughly 10%. There are also various bear ETFs, including sector specific and leveraged funds such as the UltraShort Oil & Gas ProShares (AMEX: DUG). This fund seeks returns that equal twice the inverse performance of the Dow Jones Oil and Gas Index.

(Please note: The companies/funds mentioned above are not actual recommendations, just examples).

Buff Up In A Rough Market

The bottom line here is that you shouldn’t just run off with the crowd and sell off, because that’s what they’re doing. Take a page out of Warren Buffett’s book instead.

Granted, the guy can afford to lose a few dollars here and there, but his investment philosophy is the important thing: He doesn’t cave into uncertainty, fear, or panic. He just rides out the market’s fluctuations and, in fact, rather than selling off, he uses downtimes as an opportunity to accumulate his positions for a discount.

And that’s what has helped make him one of the world’s most successful investors.

By coincidence, Marc just e-mailed me the first part of his next Xcelerated Profits Report article, which ties into this perfectly. He says:

“Market slides like the one we’re experiencing give us an opportunity to get into great stocks at prices we could only have dreamed of just a few weeks earlier. Yes, it’s tough to buy while everyone is selling, but history shows us the most money is made by buying into a panic.

“I’m not suggesting we just blindly throw our money at the market. But the selloff is providing us with an opportunity to get involved with biotech – and I can’t think of a sector I’d rather be in than biotech right now. No matter what the economy has in store for us, people are going to continue to take the medicines that fight their illnesses. And this month, I’ve got two recommendations that have me salivating…”

Out of fairness to our paying subscribers, I can’t reveal those picks to you here. But if you act fast, you can get yourself on our list in time to receive them in the upcoming issue. It costs just $49.50 for a 12-month subscription and each issue is guaranteed to contain not only specific recommendations, but also the sophisticated, professional strategies that will elevate you above the crowd and allow you to make more money more safely and in a faster time. Check it out here.

Source: You Can Profit In A Miserable Market Like This – Here’s How…

This from Today’s Financial News:

Thanks to fears of a strong global recession and larger-than-expected downturns in pivotal countries like China and India, crude prices are on the decline. Right now, a barrel of oil is selling for nearly half of what it did during its record-smashing peak just a few months ago.

But we have not seen anything yet. Crude prices will continue to fall. And if you invest accordingly, you can put some hefty profits in your pocket.

Earlier today, OPEC announced it has significantly reduced its oil-demand forecast. The group says it now believes the world will require 87.2 million barrels of oil each day next year, a decline of 450,000 barrels. It also announced its members will most likely cut production by one million barrels per day.

Today’s news solidifies the belief that oil supply has finally overcome global demand and a surplus is on the way. Crude prices will continue to fall.

As an investor, you have many ways to play this situation. You can invest in the companies that will do well when oil prices fall. But in a recessionary economy, that is a risky move.

A better bet would be to short oil producing companies. You can directly short companies like Exxon Mobil (NYSE:XOM) or you can purchase put options.

But what if you want to directly short oil prices? After all, shorting an oil-producing company is far from a pure play.

The best way to take advantage of falling crude prices is through the UltraShort Oil and Gas ProShares (AMEX:DUG). The exchange-traded fund (ETF) moves inversely to the daily fluctuations of oil prices at a two-to-one ratio. In everyday words, if oil prices go down two percent, the fund increases in value by four percent.

It is a pretty sweat deal when crude prices are dropping, huh?

The country is in the grips of a recession and the equity market is all over the place making buy-and-hold investors nauseous.

I know it is tempting to keep your money on the sidelines, but it can be a costly mistake. There are gains to be made out there.

Invest in the UltraShort ETF and take advantage of crude’s decline. We made money as prices soared. Now we can make even more as they plunge.

Source: Crude prices plunge: Use an UltraShort ETF (DUG) to make 2-to-1 profits

What we can say is that oil is still sky high at $139 a barrel.

Shock Market Trader editor Mike Burnick says there could be a painful correction around the corner. If there is, there’s one sub-sector of the energy industry that would actually benefit big time from such an oil correction: refiners…

Since 2001, the price of a barrel of oil has risen more than 600% to a recent high of US$145. The price of unleaded gasoline however has jumped “only” 300% or so over the same time frame to a recent price of US$4 per gallon.

Stuck Between High Taxes and Refining Costs

That math just doesn’t add up if you’re in the refining business. Not surprisingly, the price of oil is the biggest factor that determines the price of gas. In fact, crude oil accounts for 75% of the total cost of gasoline. The other next two biggest factors (at about 10% each) are taxes, and refining expenses.

There’s no way to avoid the taxes. One of the Presidential candidates proposed temporarily suspending Federal taxes on gas recently. But then someone pointed out that nobody would fix the potholes or widen the lanes on the interstate highway system if they stopped collecting gas taxes. That comment effectively silenced the idea.

So with taxes pretty much a “fixed cost” and crude prices escalating, the companies that refine oil into unleaded gasoline and diesel have been caught in a squeeze play. And it has decimated their profit margins.

In fact, profits at U.S. refinery operators plunged 98% in the first quarter because they were caught behind-the-curve on skyrocketing oil prices. Refiners have been raising prices to be sure. But they just haven’t been able to hike prices for gasoline, heating oil, and jet fuel fast enough to keep up.

To Know When Refiners Are a BUY Again…Keep an Eye on the Crack Spread

As a result, refinery stocks in the S&P index have been clobbered. These stocks have sunk 40% even as oil prices set new record highs. But the key to refinery profits is what’s called the crack spread.

The crack spread is the theoretical profit margin a refiner should earn from processing three barrels of crude into two barrels of refined gasoline and one of heating oil. That spread has plunged 38% over the past year. And it’s taken industry profits down the drain along with it.

But crack spreads, like so many relative price relationships in financial markets, are constantly shifting from peak to valley and back again. Last year the crack spread for refiners was almost US$23, today it’s just under US$14 — a big shift.

As you can imagine, this huge shift has come from crude oil’s unusually strong advance. Falling crude prices however can actually be a boon to refiners. “You really want to own refiners when oil’s going down, and not straight up,” according to Cambridge Energy Research.

But now energy sector fortunes may be reversing. At least that’s what smart-money investors, including industry insiders and hedge fund mangers, are saying.

In the last month alone, refining company executives have purchased US$2 million worth of their own shares, according to Bloomberg. That’s more insider refiners buying than at any time since 2000. In fact before March of this year, insiders had been very consistent net-sellers of refining stocks — “dumping more shares than they bought every week since 2003.

“Anyone right now buying the refiners would have to be banking on a pullback in oil prices,” according to one fund manager interviewed by Bloomberg.

A Lower-Risk Way to Make Money Off a Widening Crack

Buying the refinery sector right now just might be your best bet among the various energy sector plays, especially considering the “speculative” overbought state of crude oil futures at the moment.

Unfortunately, there’s no ETF I know of that gives you a broad based bet on the refining sector, at least not yet. Several leading refiners including Valero Energy (VLO) and Tesoro Corp (TSO) are among the stocks with big recent insider buys, according to Bloomberg.

This should even make a good “pairs-trade” strategy for you. Typically a pairs-trade involves going long one stock or ETF — in this case a refiner. Meanwhile, you would sell-short another major, integrated oil firm like say, Exxon Mobil (XOM) at the same time.

But here’s a pairs-trade twist that goes long-long — perfect for retirement accounts.

Buy the ProShares UltraShort Oil & Gas (DUG), which is designed to go up in price as the overall energy sector declines. At the same time, buy your favorite refiner, and earn potential gains as the razor thin crack spread widens again.

Source: What to Buy Before the Oil Bubble Busts

A recent entry to the game is the UltraShort Oil & Gas ProShares (DUG).

ProShares introduced this “inverse fund” in February 2007. It makes big money when oil stocks fall and loses big money when oil stocks rise. Since inception, this bet against ExxonMobil, Transocean, and Schlumberger has plummeted. The current rally in all things related to  has sent the fund to an all-time low.

All assets boom and bust, so we’re sure this fund will be a winner someday. For now though, DUG is getting battered the old fashioned way: going against the trend… in this case, the trend of record cash flows moving toward the companies that dig, drill, refine, and transport fossil fuels. Take that, tree huggers.