STOCK MARKET RALLY? WHAT MARKET RALLY?

2006 began the year on a positive market note. The indicators turned positive and January saw positive movement in both the S&P 500 Index and the NASDAQ index. This positive movement continued in both indices until about Mid-May. Then the indices began precipitous declines. Below this Post are graphs of the S&P 500 and NASDAQ that show the action for the last 6 months. They roughly indicate that the positive moves of January-May have been reversed and the indices stand approximately where they did five months earlier.

GO SHORT?

The Author currently has no positions in individual equities and all of the market indicators he follows are negative. The NASDAQ index, gauged through its proxy QQQQ, the NASDAQ Exchange-Traded Fund (ETF), has lost near-term support and the Author has effectively shorted the NASDAQ. When the Author wishes to take short positions against the major market indices, he purchases shares in the RYDEX mutual fund family inverse funds. Rydex offers several funds that perform inversely to a targeted index. Additionally, some of these inverse funds operate 2 times inversely to the targeted index.

DOUBLE YOUR LEVERAGE, DOUBLE YOUR FUN!

The Rydex Inverse Dynamic OTC fund operates 2 times inversely to the NASDAQ index. So if the NASDAQ coughs up 1% of its value on a given day, the Rydex Inverse Dynamic OTC fund (RYVNX) will RISE by 2%. If the NASDAQ falls by 2%, this RYDEX fund is up 4%.

Inversely, of course, when the NASDAQ is up, this RYDEX fund will fall by 2 times the NASDAQ gain. RYDEX also markets funds that move equally inversely to several indices. So why would an investor go with a double-inverse fund?

Let’s say an investor has $100,000 in her portfolio and wants to take a 20% short position on the NASDAQ. She only need buy $10,000 shares of the RYDEX Inverse Dynamic OTC fund to accomplish this $20,000 short position. This leaves her with $90,000 to invest elsewhere, or leave in money instruments that are paying about, or a little over, 5%.

SO WHAT ABOUT THE S&P 500?

The S&P 500, as measured by its proxy, SPY (SPIDRS ETF) has not broken medium-term support. It is close, however. When it does lose support, the Author will advise.

SO WHAT ABOUT EVERYTHING ELSE?

Further market weakness can be capitalized upon with short positions and the purchase of puts. The Author is a little busy right now so he will stay in cash and short appropriate indices with the RYDEX funds. And anyway, it is summer. The Author is spending his free time at the pool, in the garden, at the movies, and of course on his Ducati. You have some fun too! When the market indicators reverse, we will let you know.

And in a day or two, the Author will repost some materials about using long puts to make money with a falling stock (Or index). Dip a toe or take a cannonball jump!

EVERYONE GETS A FEW DAYS OFF IN THE DESERT OF THE REAL!


IMPORANT DISCLAIMER: This weblog is offered for informational purposes only. Sources of information provided are believed to be reliable, but are not guaranteed to be complete or without error. Opinions and suggestions are provided with the understanding that readers acting on information contained herein assume all risks involved. The Author may or may not buy or sell securities discussed on this website.