Is The Bear Stirring in His Cave?

Uncertainty in the Middle East is rattling world markets on an almost daily basis, and in my opinion, it's likely that this upheaval isn't going to end anytime soon.

Libya is on fire, of course, but more ominously for Western interests is the threat to Bahrain which is the headquarters of the US 5th Fleet in the region, and even the Saudi empire could come under siege as “The Facebook Revolutions” spread across the oil sands of the Middle East.

A key day will be this Friday and the outcome of the rumored “Day of Rage” and its planned protests that have already been banned in the Kingdom.

There is always danger and opportunity in fluid situations like these, but if world stock markets and economies get hurt by sustained high prices in the energy sector, it will also be important to consider ways to protect your wealth and profit from the potential decline in global and domestic equity indexes.

Here are some tactics to consider during these turbulent times:

Moving a portion of their portfolios to cash. Professional investors and managers routinely move assets to cash when the market heads south. The old adage, “Cash is King,” is particularly valid during bear market melt downs.
Using stop loss points to exit profitable positions and take profits home or minimize losses on losers. Markets have been in a historic run up since the “March lows” of 2009, and investors with large unrealized gains are taking “cash off the table” as risk seems to be increasing.
Buying protective put options to hedge long positions and limit losses without selling positions. This is cheap insurance to protect those gains that have been so sweet since the Fed starting pumping the markets higher almost two years ago.

The point is that investors who are winning during this difficult time understand that if they're not losing money, they're effectively making money because when things turn back up, they'll be moving ahead with wealth accumulation instead of spending what could be years just getting back to break even.

Investors Can Actually Make Money During Bear Markets

Most investors will continue doing what they always do, sitting around wringing their hands and worrying and searching the financial press and television, looking for a nugget of hope from people who know less than they do.

But there is another group of individual investors, financial advisors and newsletter writers who have been able to capitalize on this recent decline in the market. It's not rocket science and here are just three methods they're using.

Buying stocks, ETFs or mutual funds that do well in bear markets. This is an obvious possibility, and, in fact, many investors have already figured this out. Possibilities include the traditional defensive sectors like consumer staples and utilities.
Buying bonds, mutual funds or Exchange Traded Funds that track widely followed bond indexes because bear markets are typically accompanied by a flight to quality.
Buying “inverse” ETFs that move opposite to the underlying index and so the value of the investment rises as the underlying index declines. This has been made possible through the relatively recent development of these inverse funds, and one of the best providers of this product that I've found in my work at Wall Street Sector Selector is the ProShares Family of Exchange Traded Funds. They offer a wide variety of inverse ETFs that allow “shorting” of the market, that can be used in both qualified and non-qualified investments and that track the major indexes, sectors and international. Inverse ETFs are tricky and you need to understand how they work and have a proven tactical trading plan, but if you do, there is plenty of opportunity on the “short” side of the market.

So, no one can say for sure if this is the start of a new bear or if this is just a sharp correction caused by recent turmoil in the Middle East. No one can tell you when things might stabilize in the region or if things will get even worse and more unpredictable. No one can tell you that it will or won't continue. A prolonged bout of high oil prices will inevitably put a dent in developed economies like ours because, as we've discussed before, high energy prices act like a tax on personal incomes and an anchor on corporate profits since we're so overwhelmingly dependent upon foreign oil that could become a much more highly priced commodity in coming days.

However, one thing is certain and that is that some investors are making money in alternative asset classes and by using alternative strategies and all investors have options to make money or limit wealth destruction during periods of market declines.

Visit Super Sectors for more information about exchange traded funds and sector rotation

Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.