While some publications are bemoaning so-called bad conditions for short sellers, the truth is that groups of ETF investors have been doing quite well with certain bets.
The Wall Street Journal proclaimed incorrectly on Nov. 25, for instance: “It’s been a tough year for short-sellers.”
“The Dow Jones industrial average rose for the seventh week in a row,” the article stated. “About the only people gnashing their teeth are short sellers, the investors who make a living betting that stocks will fall in price rather than rise. Short seller hedge funds are down nearly 15% from the start of this year, through October.”
But it’s incorrect to assume that being a bear in 2013 has been a losing proposition. Let’s look at three markets where bears have feasted:
Shorting Long-Term Bonds
Here’s a major investment theme that’s been hidden in plain sight: rising bond yields. And since bond prices move in the opposite direction as bond yields, shorting long-term bonds has been a great trade for bears.
In the ETF market, daily leveraged 2x and 3x long-term Treasury bear ETFs like TBT and TMV have seen their share prices surge between 27% and 37% year to date. When long-term Treasury prices fall as they have been, funds like TBT and TMV are designed to increase in value.
People that say stock market volatility is too high haven’t been paying attention. Over the past year, stock market volatility as measured by the S&P 500 CBOE VIX has fallen around 20%. And while the VIX has had sporadic surges this year, it’s been short-lived.
ETPs that have surged in value because of a falling VIX like the VelocityShares Daily Inverse VIX ST Futures ETN (XIV) are booming. XIV has jumped more than 78% since the beginning of the year.
But as the VIX nears multiyear lows, a reversal in stock market volatility isn’t just ahead but very likely. Put ETPs like VIXY and VXX on your 2014 watch list.
Shorting Gold Miners
Gold mining stocks (GDX) have been one of the rare areas within today’s equity market that have been safe to short. Mining shares are down more than 54% over the past year and if gold prices head lower more pain could be ahead.
Via our time-stamped ETF Weekly Pick to subscribers on Sept. 18, we wrote: “Gold miners are a leveraged play on physical metals and if the next leg down in metals prices takes hold, as we suspect, miners should lead the way down. Buy DUST around $24.60 with a price limit up to $25.25. DUST aims for triple opposite daily performance to mining stocks. A tandem options trade is to buy the GDX Oct 2013 25 put options (GDX131019P00025000) around $40.”
Via intraday alerts to our readers on 9/19 and 9/20 we sold our DUST position for a two-day 16.5% blended profit. DUST aims for triple opposite daily performance to mining stocks. Our tandem trade in the GDX Oct 2013 25 put options were sold for a two-day gain of 68%.
Being selectively bearish vs. broadly bearish is how smart bears have made profits in 2013.
The ETF Advisor Pro uses a combination of market sentiment, fundamental/technical analysis, history, and common sense to be on the right side of the market. Since the beginning of the year, 74% of our time-stamped ETF picks have turned a profit (through 9/30/13). (Follow us on Twitter @ ETFguide.)