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Summary Markets cratered this morning with the Dow dropping almost 1,000 points. The fact is the economy is the global economy is not strong and the weakness and China and Europe is taking its toll in the States. I discuss 3 funds you should consider holding short-term to quell losses in your portfolio. Panic. Fear. Dow down 1,000 points at the open. Despite a massive bull run, many professionals and analysts that I talk to still believe earnings estimates are too high for this quarter and next. Thus far, companies reporting earnings have delivered average results. We have a Fed that has done everything it can to inflate stock prices and keep the economy running. It is essentially our of tricks. Now, while the markets are rebounding off of the lows today, the worst may bot be over. Fear has skyrocketed and while some may buy quality companies at a fair price on the way down, this is likely the beginning of an overdue correction. Image source: UK telegraph The fact is the economy is not strong. The weakness and China and Europe is taking its toll in the States. These events will likely exert pressure on markets that have essentially been propped up by central bank actions. Thus, traders may want to consider taking some bearish action should market panic ensue. Those who are bearish could consider selling stock, selling covered calls on their positions, shorting stocks, buying puts or investing in a bear fund. While each of these approaches has its respective benefits and risks, in this article I want to highlight three ETFs that could provide great returns in the event of a market sell-off on fear of uncertainty, disappointing earnings or continued international news that spooks markets. Direxion Daily Small Cap Bear 3X Shares (NYSEARCA: TZA ): This is my favorite way to invest in a bear market short term. TZA seeks : Daily investment results of 300% of the inverse of the price performance of the Russell 2000 Index (also known as the small cap index). The Russell 2000 measures the performance of the small-cap segment of the United States equity universe and consists of the smallest 2,000 companies in the Russell 3000 Index, representing approximately 10% of the total market capitalization of the Russell 3000 Index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. TZA actually does not invest in equity securities or stocks. What TZA does is creates short positions by investing at least 80% of its net assets in financial instruments to provide leveraged and unleveraged exposure to the Small Cap Index and the remainder in money market instruments. TZA currently trades at $13.00 a share on average daily volume of 14.1 million shares. In the last five days TZA is up 27.1% compared with the ETF that tracks the Russell 2000 index, which is down 8.3%. TZA has a 52-week range of $8.81-$19.59. ProShares Short S&P 500 ETF (NYSEARCA: SH ): This ETF seeks : Daily investment results that correspond to the inverse of the daily performance of the S&P 500 index. The S&P 500 index is a measure of large cap United States stock performance. It is a capitalization weighted index of 500 United States operating companies and selected real estate investment trusts. SH attempts to invest: At least 80% of its net assets, including any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are inverse to those of the index. It intends to invest assets not invested in financial instruments, in debt instruments and/or money market instruments. The Fund intends to concentrate its investments in a particular industry or group of industries to approximately the same extent as the index is so concentrated. SH currently trades at $22.80 on approximately 3.6 million shares exchanging hands daily. SH is up 9.0% in the last five days, while the S&P 500, as measured by the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) is down 8.8%. SH has a 52-week range of $20.58-$24.86. Direxion Daily S&P 500 Bear 3x ETF ( SPXS ): SPXS, formerly the Direxion Daily Large Cap Bear 3X fund, seeks : Daily investment results before fees and expenses of 300% of the inverse of the price performance of the S&P 500 Index. As with other funds there is no guarantee the fund will meet its stated investment objective. The fund has a 0.95% annual expense ratio. Under normal circumstances SPXS management creates short positions by investing at least 80% of its net assets in: futures contracts; options on securities, indices and futures contracts; equity caps, collars and floors; swap agreements; forward contracts; short positions; reverse repurchase agreements; ETFs; and other financial instruments that, in combination, provide leveraged and unleveraged exposure to the S&P 500. SPXS currently trades at $22.60 a share. SPXS has average daily volume of 3.8 million shares exchanging hands. In the last five days SPXS is up 29.4% while the SPY is down 8.8%. SPXS has a 52-week trading range of $16.98-$30.83. Image source: memegenerator.net Take home message: There are lots of ways to prepare for a potential short-term bear market including selling covered calls, buying puts, shorting stocks and stock indices, or just plain old selling equities to raise cash. While central bank action has bolstered markets for years, I believe earnings reports as well as turmoil in Europe and China will dictate the direction of the market. The aforementioned funds perform very well in the events of market sell-offs. Disclosure: I am/we are long TZA. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I have call options in TZA Scalper1 News
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