SMSF Investment StrategiesSharing Simple Strategies for Self Managed Super Funds
2010 Bear Market Strategies
I was surprised when I found out that the top keyword search phrase for my blog this month was “2010 Bear Market Strategies”. Due to the lack of bearish articles on Australian sites, my little old blog appeared in the top 2 listings on the Google search results! For the few bears out there (according to Investors Sentiment Index, we are nearly an extinct species), this post is for you. Both Investor Sentiment and Volatility Index (see chart of $VIX below) are showing a level of bullishness similar to October 2007 when the markets peaked. All the pain suffered in 2008 seems to be forgotten.
For those who are feeling bearish in 2010, the simplest strategy is to get out of the stock market. If you had long positions in 2009, you probably would have made some money or at least recovered some of your losses. If your view is that the market will stay flat or go down in 2010, why not take some of your profits and place them in some low risk investments which can provide a decent return. In Australia, we are fortunate that our bank interest rates have gone up and it is possible to get decent interest rates on our cash deposits. Our SMSF has a couple of term deposits with Ubank (see my Nov 9, 2009 post for more info on Ubank) which are returning as much as 6.81% p.a. If your money is in a super fund or mutual fund, you can switch your asset allocation to favour fixed interest assets instead of equities.
In my Aug 19, 2009 post, I talked about a couple of ways that a SMSF can profit in a falling market which was mainly:
- buy put options
- buy inverse Exchange Traded Funds (ETF)
At the time, I was not really keen on put options because they were still quite expensive due to the high volatility. I also knew that it can take months for market tops to form and options have a time premium and expiry date, so if you get your timing wrong, you could lose money even if the underlying market goes in the direction you expected. In August 09, the rally had only retraced less than 50% of the down move and according to Fibonacci, bear market rallies can easily retrace up to 61.8%. The chart below of DIA (the ETF that tracks the Dow Industrial Index) is now showing a retracement to this level. There is a high probability that the market can turn at this point. Due to the low volatility, option premiums are now cheap so buying some put options on the DIA or other index ETFs is a low risk trade. If DIA convincingly breaks above the 61.8% level, you can close the option at a small loss. This is still a speculative trade, so I would suggest that you only use a small portion of your funds for this type of trade.
Elliott Wave International just released the January edition of their flagship publication “The Elliot Wave Theorist”. Robert Prechter has some pretty strong warnings for investors in this issue and I would highly recommend that everyone read his analysis immediately. Get instant access by signing up for a risk free trial today. You can always unsubscribe and get your money back if you disagree with his views. He has been right about the crash in late 2007 and the rally in March 2009 so even if you are a raging bull, why not spend a few minutes to read what he has to say?
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[...] for some time now, and have recently discussed some bear market strategies that we use in my Jan 15 post. Shortly after writing that post, I bought some call options on SKF, a double inverse ETF which [...]