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How and Why to Use Short Index Funds


In an extended up market, look at short index funds for a hedge and/or short-term trade.

Let me preface this article by saying that I have been actively investing for a long time, so please understand that using index short funds is for experienced professionals and not your average investor. That said, I have also been actively investing long enough to know that markets and stocks do not go up (or down) in straight lines. Translation: Nothing is guaranteed. So many people nowadays want guarantees in investing (and life), but that's just not how life rolls. Furthermore, I think many get caught up in their own emotion and impatience when dealing with money, and this increases the likelihood of being let down when their ideas get too rose-colored and don't work out according to plan.

It is the expectation of something great (or devastating) that catches investors leaning the wrong way every time. And it is around these emotional, "all-in" times that I decide to hedge or go against the grain. And in an extended up market, I start to look at short index funds for a hedge and/or short-term trade. Simple as that. Again, short term trade and/or as a hedge. I'm not looking to try and ride out a multi-week pullback and make a fortune. Heck, I'm not really one to short stocks in general (just not my forte). What I am most interested in is either a) protection for current long positions and/or b) making a quick dime on a pullback. It's all about protecting my hard-earned money and investments by managing risk and playing the unfolding technical odds. And, no, not the Vegas odds. Indicators and technical analysis provide me with clues when markets or stocks are getting overbought and/or close to important areas of resistance. (For more on this, read Ten Tools and Metrics of Successful Investors.) And it is in these areas that I like to layer out of long exposure and into short index funds.

I'm sure some of you have seen my technical charts posted on my site or on Minyanville's Buzz & Banter. If not, check them out (along with other "technicians") and push yourself to research and learn something new. Technical charts may seem foreign to the average investor, but if nothing else, block out the stuff that's over your head, and revert to learning more about simple technical analysis metrics like trend lines and support areas.

Currently, I am roughly 30% short index funds ((SH) and (SDS) in the S&P 500 index family), and have very little long exposure. My breakeven price on the combined SH/SDS funds equates to roughly 1305 on the S&P 500. And if the market pushes higher today/tomorrow (as I expect it to), I may increase my exposure. Again, this is a short-term trade and I will consider taking these investments off if the technicals change (i.e. a sustained break above S&P 500 1344 – see chart below). Note additionally that this is separate of my view of individual stocks/sectors – this is no longer an "all one market." Some short index funds include SH (short S&P 500), (DOG) (short Dow30/Dow Jones), and (PSQ) (short QQQ/Nasdaq 100). Double shorts, like the SDS are available as well for certain indices.

Happy investing.

Editor's Note: Andrew Nyquist is an independent investor based in the Minneapolis area. This article originally appeared on his investing and economics site, See It Market. His writings also appear on Minyanville's blog community.

Twitter: @andrewnyquist
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No positions in stocks mentioned.

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