Thestock market rarely moves in a straight line.
That's why many investors grew anxious in recent months as the
S&P 500 managed to rise in 10 out of past 11 months. So it
should come as little surprise that the market may be shifting
gears as the second quarter gets underway.
The S&P 500 has fallen more than 1% on three separate
occasions in the past two weeks, which has raised the specter of
another spring sell-off. As I've written before, the market has
suffered drops ranging between 9% and 17% in each of the past
But if we are headed for a similar downturn, then there's no
reason you must sit idly by and watch your portfolio shrink. Here
are several ways you can juice your returns, even in a down
1. Own volatility:
One of the most remarkable byproducts of the recently rising
market has been the dissipation of investor fear. Volatility, as
measured by theVIX index , fell by half from June 2012 through
the end of the first quarter of 2013.
But since bottoming out around 12 a week ago, theVIX is
alreadyback up to 16.5. For reference, the VIX surged to 45 in
the spring of 2010 and again in the spring of 2011, though it
peaked at 27 ayear ago when the market was falling.
You canprofit from a rise in the VIX through a range of
). I'm partial to the
VelocityShares Daily 2x VIX ST ETN (Nasdaq:
. This is a "2X"fund , which means it moves twice as fast as the
VIX. So a 50% jump in the VIX (from a recent 16.5 to around 25)
wouldyield a 100%gain for thisETF . This is obviously a
speculativeinvestment and should be only a small part of your
2. Watch theinsiders and buybacks:
If the market heads lower, then companies tend to step up their
pace of buybacks; insiders tend to step up their purchases as
well. Insiders tend to aggressively purchase company stock when
their own company's outlook is more robust than a flagging share
price would indicate.
Insiders are typically unable to buy shares ahead of a
company'searnings release, but as we head into the heart of
theearnings season ,insider buying should pick up -- and you
should be scanning the insider activity on a regularbasis . I
recommend InsiderInsights.com for its timely release of insider
3. Venture abroad:
Even as our key market indexes remain close to their peaks,
manyemerging markets have reflected a more skittish mood in light
of the still uncertain globaleconomy . For example, the
Market Vectors Vietnam ETF (
has already given back its recent impressivegains .
iShares FTSE China 25Index Fund (
has slid 15% during the past three months, compared to a 5% gain
for the S&P 500. Meanwhile, the
Market Vectors Brazil Small-Cap ETF (
has dropped 30% during the past two years, while the S&P has
risen 20% in that time. That disconnect of 50 percentage points
should spell opportunity for long-term investors.
In light of the uncertain U.S. market for the weeks and months
ahead, it may be a bit premature to jump right into
emerging-market funds, as they tend to slump badly when the U.S.
and European markets pull back. Yet history has shown that these
sharp pullbacks can create great entry points. So now is the time
to start monitoring these markets and funds, as some of them may
soon slump into deep-value territory.
4. Short Treasurys:
Although the stock market is just beginning to show signs of
weakness, thebond market has already sounded the alarms. The
yield on 10-year Treasurys has steadily fallen by nearly 16%
The fall in yields typically signals a weakening economy. But a
large number of
economists still think
the U.S. economywill perform much better in the second half of
"S&PEconomics is still projecting a 2.7% increase in
realGDP for all of 2013, with growth above 4% in the second half
and growth of 3.1% for all of 2014," said Sam Stovall,
chiefequity strategist at S&PCapital IQ . If he and other
economists are correct, then the yield on 10-year Treasurys will
move right back up above 2% or higher later this year.
That's why it may be profitable to invest in the
ProShares UltraShort 20+ Year Treasury (
, which moves in the opposite direction of bond prices, at twice
Anotheroption is the
Direxion Daily 7-10 Yr TreasuryBear 3X Shrs (
, which moves at three times the rate of bond yields -- in the
Risks to Consider:
As anupside risk, we have yet to reach the peak of the
earnings season, and better-than-expected results could empower
the bulls to return to their buying ways.
Action to Take -->
The market gives and the market takes. Yet even in a market
retrenchment, there are still plenty of ways to profit. Any of
the ways I've mentioned in this article should be strongly
considered as defensive mechanisms in this market.
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