How to Turn a Stock Market Sell-Off into an “Extreme Profit” Opportunity

Most investors look at the stock market in a very conventional way.

Bull markets are good. Bear markets are bad.

As a tech-investor friend of mine has said, that’s a “binary” view of the financial markets.

[ad#Google Adsense 336×280-IA]You make money when stocks rise. You lose money when they fall.

But I’m different. I’m a trader. I just look for opportunities – wherever they are.

And I believe there’s always a place to make money.

Always.

When stocks rise, I make money – by “going long.”

When stocks fall, I make money – by “going short.”

If you’re tired of getting beaten up when stocks dive – which they’re doing again – it’s time you learn how to punch the stock-market bear right in the schnozz… and transform any stock market sell-off into an “Extreme Profit” opportunity.

It’s simpler than you think.

The windfall will be huge.

And today I’m going to show you exactly how to do it…

Beware of Falling Stocks

There’s a reason most retail investors obsess over the long side of the market and ignore the short side: The short side seems complicated, risky, and expensive.

Those worries have a basis in reality. To short stocks, you need a margin account or you have to use options. And unlike their long side counterparts, investments on the short side can pose situations where the loss potential is unlimited.

With my strategy, you can sidestep all of that complexity.

All you need are a handful of specialized exchange-traded funds (ETFs) – one of the greatest Disruptors/inventions to hit the financial sector in years – and you’ll be able to protect whatever assets you own and cash in big when stocks hit the skids.

These special funds are called “inverse” ETFs.

Because inverse funds rise in price when stocks head south, not only will you never fear markets again, you might actually welcome downdrafts and bear markets.

Why would you welcome down-trending markets? Because stocks always fall faster than they rise.

So not only will you make money on falling stocks… you’ll make it quickly.

Inverse ETFs are designed to do the opposite of whatever the index they track does.

For example, let’s assume one of your holdings closely tracks the Standard & Poor’s 500 Index. Perhaps it’s an actual “index” fund. Or maybe it’s an ETF, a basket of stocks that’s designed to mirror the performance of the much-followed 500-stock index.

If you reach a juncture where you’re worried – or downright believe – the S&P 500 is headed down, you don’t have to sell your mutual funds or ETFs or liquidate your stock portfolio.

You can just buy an inverse ETF.

In fact, you can buy an inverse ETF based on the S&P 500 index. The ProShares Short S&P 500 ETF (NYSE Arca: SH) is designed to move opposite the S&P 500. If the S&P 500 goes down 2%, SH will go up 2%.

That’s what inverse funds do.

Not a Marginal Call

The beauty of inverse funds is that you are essentially “shorting” the market – or whatever index you’re interested in – by buying a fund.

Because you’re buying – purchasing a security – you don’t need a margin account.

Think about that for just a moment. It’s a very powerful idea.
Being able to short the market simply by purchasing a fund is a game-changer for most investors who don’t know how to short, don’t like to short, or can’t short because they hold stocks or mutual funds in a retirement account.

This is important to understand, because it’s one of the true hidden benefits of inverse ETFs.

When you short a stock – or an ETF – you have to do it in a margin account.

There’s a reason for that.

When you short a security, what you’re actually doing is selling something you don’t own.

You “borrow” a security from someone else, sell it, and reap the proceeds of the sale.

As a short-seller, you do this believing the price of that stock or fund is going to fall – meaning you’ll be able to buy back in more cheaply sometime in the future.

The difference between the money you brought in when you sold it high – and the cash you spent to buy the stock back cheaply after its price has fallen – is your profit.

Here’s the problem.

When you sell something you don’t own, its trading price can theoretically keep going up, meaning you’ll keep losing money. Wall Streeters refer to that as having “a trade go against you.”

And if your short goes against you enough, you’ll get a “margin call,” meaning you’ll have to add more capital to your account.

The more your position goes against you, the more margin you’ll have to put up.

You can’t short in an IRA account because IRAs can’t use margin.

Most people – including your broker I’m willing to bet – don’t know why you can’t use margin in an IRA. It’s because you’re limited to how much you can put into your retirement account in any given year. If you traded on margin and got a margin call and couldn’t put up any more money because you maxed out your contribution for the year, that wouldn’t work for your brokerage company. That’s why you can’t short in your retirement account.

But, of course, you can buy. That’s what makes inverse ETFs so genius. You can short markets all you want by buying inverse ETFs.

The “Big Three” – and I Don’t Mean GM, Ford, and Chrysler

I follow and trade the big three U.S. benchmark indexes: the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite Index.

I use ETFs to buy these “markets.” The ETFs that mimic these three U.S. benchmarks are the SPDR S&P 500 ETF Trust (NYSE Arca: SPY), the SPDR Dow Jones Industrial Average ETF (NYSE Arca: DIA), and the PowerShares QQQ Trust Series 1 ETF (Nasdaq: QQQ).

When I think the markets are going to head down, I can sell my ETFs and then turn around and short any or all of these three – as long as I do that in a margin account.

A lot of the time, however, instead of shorting these ETFs, I’ll buy inverse ETFs instead.

The inverse ETF that moves opposite the S&P 500 and SPY is the aforementioned ProShares Short S&P 500 ETF (NYSE Arca: SH).

The inverse ETF that’s the counter to the Dow and DIA is the aptly tickered ProShares Short Dow30 Fund (NYSE Arca: DOG).

And the inverse fund that moves opposite the Nasdaq and QQQ is the ProShares Short QQQ ETF (Nasdaq: PSQ).

I like these three funds – I refer to them as the “Big Three Inverse ETFs” – because they’re super easy to buy, are cheap on account of their low expense ratios, and have very tight spreads all day long.

Even if your stocks or mutual funds don’t exactly mimic these benchmarks, you can still hedge what you own pretty easily. Estimate their total market value and then buy enough of one of these inverse ETFs so if the value of all your holdings fall by 5%, 10%, or more, you make that much when your inverse ETF advances by about the same amount.

There are lots of inverse ETFs that you might want to use to hedge your portfolio instead of the Big Three.

That’s what’s so great about ETFs – and underscores why they have been such huge market Disruptors in the financial-services arena: ETFs come in all sizes and flavors and can be used to create liquid, easy-to-execute trading strategies to pursue almost any objective you can think of.

Inverse ETFs are no exception.

If you’re worried about the broad stock market, there are inverse ETFs available to protect your overall holdings. If you’re worried about a specific industry, a business sector, or even a geographic market, you can bet there are inverse ETFs available to protect that portion of your portfolio.

There are even inverse ETFs that will let you hedge things besides stocks – other classes of assets. We’ll get into all of those in the weeks ahead.

In one upcoming report on these great financial Disruptors, I’m going to tell you about leveraged inverse ETFs, which move two or three times as much as their non-leveraged inverse counterparts.

But the opportunity that has me the most excited right now is the one that will let us employ these inverse funds for pure profit.

Our first big opportunity to profit from what could be a big downdraft looks like it’s shaping up right now. Judging from the way the markets are acting, I won’t be surprised to see stocks drop back to their August lows – and then crash through those support levels to find even lower lows.

I’ll be back very soon to tell you what to look for and to spotlight the inverse ETF we’re going to play to before that happens.

And when you turn the biggest correction in years into a big payday, you’ll understand why I so fervently believe that there’s always a place to make money…

And why the market catalysts I refer to as Disruptors are the key tools to finding those big paydays… over and over again.

— Shah Gilani

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Source: Money Morning