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Cash In With These 3 Powerful Bear Market Lessons

Mar 06, 2009
Simon Maierhofer

Congratulations! You have just completed a crash course on "how to lose 50% in 18 months." Aside from the obvious, there are valuable lessons to be drawn. Apply them and prosper.

Congratulations! You are about to graduate from a 18-month investment boot camp.

Quite possibly against your will and without prior knowledge, your 401 (k), IRA or brokerage account signed you up for the boot camp. The boot camp - delivered by Dow Jones & Associates as of October 2007 - was without charge but most certainly came at a high price.

It may not be your fondest memory, but when the boot camp started, the Dow Jones (AMEX: DIA) stood as high as 14,280, the S&P 500 (AMEX: SPY) as high as 1,599 and the Nasdaq (Nasdaq:  QQQQ) as high as 2,809.

Certainly, the (mental and financial) pain experienced (50% plunge), makes you wonder whether the experience was worth it. Only time will tell whether you will put the lessons learned to good use.

They don’t deserve your time of day

Fool me once, shame on you; fool me twice shame on me. How often has the main stream media or talking heads like Jim Cramer lead you down the wrong path? At the very least, the last year or so should have taught you who not to trust.

Making or losing money is very serious, so you should ask yourself: Who deserves the right to exercise any authority over your investment decisions? Once again: Who deserves the right to exercise any authority over your investment decisions?

The largest mutual fund tracker reported last December that the Dow is selling at a 30% discount with the implication of a November 21st market bottom. In the summer of 2008, Smart Money magazine shouted from their front page that now is the time to buy stocks and real estate.

On March 11th, 2008, Jim Cramer told investors: “Bear Stearns is fine, do not take your money out!” On June 5th, CNBC’s Power Lunch pointed out that Lehman Brothers won’t end up like Bear Stearns. On April 17th, CNBC’s Squawk On The Street was quick to point out that Merrill Lynch won’t need any extra capital. We all know what happened to Bear Stearns, Lehman Brothers and Merrill Lynch.

On October 4th, Jim Cramer exclaimed that “Bank of America (NYSE: BAC) is now the cheapest and the best of the financial stocks and will be at $16 in a heartbeat.” Today BAC is at $3.20. Nevertheless, Jim Cramer keeps on discrediting short ETFs, the only class of funds that has protected investors against his nonsense advice.

Guidance you can trust

In stark contrast, ETFguide has been bearish on the market since late 2007. On October 2nd, when the initial $700 billion bailout was approved, we outlined in detail why it will fail. For 2008, we called a bottom below Dow 7,500 followed by a rally towards Dow 9,000 with a subsequent drop to new lows (available to subscribers of the ETF Profit Strategy Newsletter).

We further defined the target range for new lows on January 15th. Here’s the warning our subscribers received: “At this point, the best target for a temporary low is 6,700 for the Dow and 700 for the S&P 500. Extreme pessimistic sentiment may drive the indexes even towards Dow 6,000 and S&P 600."



In fact, our February 2nd article, “
11 ETFs For The Dow 6,500 Portfolio ” was received with skepticism and mockery at the time. Today however, the Dow is just a few points shy of 6,500. The article outlined three different approaches to combat the bear: 1) ETFs that provide safety 2) ETFs that soften the blow 3) ETFs that make money in a down market. 

All ETFs recommended accomplished their mission. The five ETFs recommended as profit centers are all up 20% and more, in a market that has lost more nearly 20%. Those ETFs were: ProShares UltraShort Financials (NYSEArca: SKF), ProShares UltraShort Real Estate (NYSEArca: SRS), ProShares UltraShort Consumer Services (NYSEArca: SCC), ProShares UltraShort S&P 500 (NYSEArca: SDS) and the ProShares UltraShort Dow 30 (NYSEArca: DXD).

As the market has dropped to levels not seen for over a decade, investors are wondering if this bear has finally hit rock bottom.

It isn’t over until it’s over

Investors have made it very clear that they simply do not want to own stocks at this time. Indiscriminatingly, investors have been selling large cap stocks (NYSEArca: IWB) with the same ferocity as small cap stocks (NYSEArca: IWM). Value stocks (NYSEArca: IWD) are being unloaded at the same pace as growth stocks (NYSEArca: IWF).

The headlines featured in the financial media (and mainstream media) along with various investor sentiment readings point towards an end of the market meltdown, at least for now. However, as long as the market continues to plow towards new lows, there is no point fighting the tape. This bear market leg is not over yet.

Nevertheless, once the market bottoms, the ensuing rally should be powerful and quick out of the gate.

How can you limit downside risk without missing out on the upcoming rally?

Will this bottom be the “real thing” or just another November 08-like decoy bottom?

Our March 4th alert provides strategies for conservative, moderate and aggressive investors designed to limit downside risk and maximize upside potential. The March issue of the ETF Profit Strategy Newsletter analyzes the four most trusted long-term indicators in order to pinpoint a long-term market bottom. The results are truly astounding. Additionally it includes a truly contrarian outlook on gold (NYSEArca: GLD) and silver (NYSEArca: SLV).

If this bear market taught you who can be trusted and who can’t, there is a chance you may thrive in the years to come while many will continue to demolish their wealth. As Benjamin Franklin said, “An investment in knowledge always pays the best interest.” More than ever before, investors unaware of the bigger picture will continue to see their wealth evaporate.

>> Protect your wealth - profit with ETFs >> Sign up for the ETF Profit Strategy Newsletter

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