Short Selling School 101

With the stock market falling for the next few weeks, or even months, it’s time to rehash how to profit from falling markets one more time.

There is nothing worse than closing the barn door after the horses have bolted.

No doubt, you will receive a wealth of short selling and hedging ideas from your other research sources and the media at the next market bottom. That is always how it seems to play out.

So I am going to get you out ahead of the curve, putting you through a refresher course on how to best trade falling markets now, while stock markets are still only 6% short of an all time high, and unchanged on the year.

Market’s could be down 20% by the time this is all over.

THAT IS MY LINE IN THE SAND!

There is nothing worse than fumbling around in the dark looking for the matches after a storm has knocked the power out.

I’m not saying that you should sell short the market right here. But there will come a time when you will need to do so. Watch my Trade Alerts for the best market timing. So here are the best ways to profit from declining stock prices, broken down by security type:

Bear ETF’s

Of course the granddaddy of them all is the ProShares Short S&P 500 Fund (SH), a non leveraged bear ETF that is supposed to match the fall in the S&P 500 point for point on the downside. Hence, a 10% decline in the (SPY) is supposed to generate a 10% gain the in the (SH).

In actual practice, it doesn’t work out like that. The ITF has to pay management operating fees and expenses, which can be substantial. After all, nobody works for free.

There is also the “cost of carry,” whereby owners have to pay the price for borrowing and selling short shares. They are also liable for paying the quarterly dividends for the shares they have borrowed, around 2% a year. And then you have to pay the commissions and spread for buying the ETF.

Still individuals can protect themselves from downside exposure in their core portfolios through buying the (SH) against it (for the prospectus). Short selling is not cheap. But it’s better than watching your gains of the last five years go up in smoke.

Virtually all equity indexes now have bear ETF’s. Some of the favorites include the (PSQ), a short Play on the NASDAQ (for prospectus), and the (DOG), which profits from a plunging Dow Average (for prospectus).

My favorite is the (RWM) a short play on the Russell 2000, which falls 1.5X faster than the big cap indexes in bear markets (for prospectus).