But it’s not the long-only investors who are making money in this market. “For the first time since 2002 investors who sell short or bet against rising stock prices are basking in some real profits,” says Eric Roseman.

Despite recent gains, this is still as bear market. US stocks are down 20% since their October highs. Two reverse ETFs have been making a killing in this environment, says Eric…

Betting against the market using reverse index funds is a highly-skilled discipline that the majority of hedge funds and investors fail to master. Most investors, even equity long/short hedge fund managers, are typically long-only investors. They’re getting trashed along with everyone else in this lousy market.

Thus far, 2008 has been the first year stocks have declined since 2002. The S&P 500 Index has declined 13% this year while the MSCI World Index has plunged 17%. Worse, developing economies have been ravaged, led by stunning losses in China, Russia and India among many others. The MSCI Emerging Markets Index is down a dizzying 21%.

If you managed to speculate with reverse indexes or exchange traded funds (ETFs) that bet against these and other indexes, then you’re sitting pretty. Even better, some of these reverse ETFs have twice the inverse correlation, meaning that they can boost your returns in a bear market.

For example, the ProSharesUltraShort MSCI EAFE ETF (AMEX:EFU) has surged 45% this year as the benchmark EAFE Index (Europe, Australia and the Far East) has tumbled 21% without leverage. If two times leverage isn’t your game, then the ProShares Short MSCI EAFE ETF (AMEX:EFZ) can still pack a big punch in a bad year for international equities.

The safest and most responsible way to use reverse-index ETFs is to hedge or protect your equity portfolio in a bear market.

But figuring out exactly how much you should allocate to these volatile products can be a tough balancing act. Your answer depends on how much exposure you have in stocks – domestic and foreign – and how much you have invested in fixed-income, commodities, currencies and other assets. Basically, your asset allocation, age, income needs and tolerance for risk will dictate this strategy.

With stocks already down 20% from their October 2007 highs, it might be too late to buy this sort of protection. But then again, if I owned a portfolio of stocks there’s no way I’d leave myself without some sort of downside protection even at these low levels.

This is a bear market and we can still decline another 10% or more.

Source: 2008 Has Been a Great Year for Short-Sellers