Extreme Investing: How to play the macro downside in 2012?

Wednesday, Dec 21 2011 by
Extreme Investing How to play the macro downside in 2012

This year has been tough for stock market investors with plenty of volatility, but next year could prove even worse for shares with big sell-offs predicted by some analysts. Indeed, analysts and commentators seem to be lining up one after the other to write off 2012, particularly the first half.

They warn that next year could even match or surpass the dire conditions experienced in 2008 with the promise of more turbulence from the Eurozone, further political wrangles over dealing with the US budget deficit and a potential host of problems in emerging market countries such as a possible Chinese banking and real estate crash.

And whereas shareholders fear plummeting stock markets with good reason, there are actually some interesting ways to play the downside or hedge portfolios without dabbling in spread betting, contracts for difference, futures and options. Part of the problem with some of these instruments, such as futures, is that you can lose much more than you put into the trade if the market moves against you. Buying options is less risky in that you cannot lose more than you put in, but after a certain amount of time they expire and if the market has moved against you, they soon become worthless.

Enter exchange traded funds and in particular the leveraged variety, which can move as if on steroids and frequently rank among the most volatile shares on the New York Stock Exchange where they're listed.

At the cutting edge of this turbo charged ETF universe are providers such as Direxion and VelocityShares. Take one of Direxion's products: the Direxion daily finance bear 3X exchange traded fund (ETF) with FAZ as the ticker. To see a graph of this ETF go to Google Finance, US markets, and enter FAZ into the quote box.

This fund is designed to move three times the Russell 1000 financial services index, but in the opposite direction. So if the index falls 10%, FAZ should rally 30%.

Financial institutions such as banks continue to figure prominently in the global crisis and regularly outpace the rest of the stock market on the downside during sell-offs, such as on the regular spasms of fear emanating from the Eurozone crisis. This makes financials a good candidate for the short side.

But Direxion has a whole range of triple leveraged funds, which are indexed…

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About Justin Pugsley

Justin Pugsley

I’m an investment writer / copywriter producing thought leadership and marketing material and insights for asset management, wealth management and professional services firms. I manage my own investment portfolio and primarily focus on investing in dividend growth shares. I also do some momentum investing and occasionally pursue short-term investment strategies at the margins of my portfolio. I’m fascinated by geo-politics, history, economics and investing.   Linkedin:https://uk.linkedin.com/in/justinpugsleyWebsite:www.jjpassociates.co.uk more »


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