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How fast time does fly. It is now over a year since the stock markets posted a important long-term Top. It was graced by a very bearish Japanese Candlestick formation, and has been marked all the way down during the cascade by a grouping of nearly identical bearish patterns. The unprecedented events attending the near-collapse of the total national financial system over the past several weeks, resulting in passage of bailout legislation, reduced many shareholders to a state of deep concern about the worth of, and prospects for, their hard-earned savings.
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How unfortunate it is that such a multitude of people have labored assiduously for so many years to set aside a meaningful sum for their “golden years”, only to be faced with a serious decline in the market value of their shares of stock – and the prospect of worse to come. What is even more unhappily the case is that they have no understanding of the protective steps which they could have undertaken beginning in October 2007, and ought to be taking right now and into the foreseeable future.
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Every investor must avoid becoming a “deer in the headlights.” The Candlestick patterns which have emerged during the past several weeks foretell the destructive power of this bear market, and the urgent need to institute counter-measures in order to protect the value of one’s holdings.
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There is “insurance” available to accomplish that result. The “insurance” is found in the form of Inverse Stock Index Funds and Inverse Stock Index Exchange-Traded Funds. There is a multitude of them available on the market, promoted by respected firms. Their stated goal is to increase in value when the particular Index to which they are tied decreases in value. Many of them operate on an unleverged basis – as an example, a particular Exchange-Traded Fund might be so structured as to increase one dollar in value for every dollar by which the NASDAQ 100 decreases in value. Many of these funds are leveraged, say on a two-for-one basis.
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More and more competent observers are coming to believe that we are in a secular bear market which is only now gearing up for a devastating depression the likes of which have not been seen since the 1930’s. In principle, I propose that every investor should create and maintain a ”Constant Short” position, using either an Inverse Stock Mutual Fund or an Inverse Exchange-Traded Fund as the vehicle; and that he or she should be depositing funds into that “insurance plan” consistently, on a regular basis. It is even possible, this way, to totally offset the possibility of loss in an investor’s portfolio. Certainly, any degree of offset would be a welcome development. On top of that, it is possible to make an absolute profit, too.
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The prices of all financial instruments move in waves, which are clearly observable on price charts. While a “Perpetual Short” program can be of great value in protecting the worth of one’s portfolio, skillful use of Candlestick analysis can also be very useful in identifying countertrends to be harvested for gain in upward countertrend corrections in a secular bear market. Various methods of technical analysis can also be a great help in identifying the likely termination point of a countertrend rally and in pinpointing a clear opportunity to “pounce on the bounce” for enhanced profit to the downside.
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