How to play a falling market

Wednesday, 24 October 2018
Melbourne, Australia
By Bernd Struben

  • Higher risk for lower returns?
  • Shorting, options, or ETFs?
  • Last chance!

Doom is in vogue…again.

And it’s dominating the financial media…again.

Like this headline, from today’s Australian Financial Review, ‘BlackRock argues markets akin to a late-stage game of Jenga’. The article continues:

Global markets are showing signs of being in the late stages of a game of Jenga, and investors need to play cautiously, argue two BlackRock executives…

“To us, the 2018 investing regime is evolving much like a late-stage game of Jenga, with the Federal Reserve and Treasury clinically and methodically removing the blocks of stability from underneath the financial and real economy ‘towers’,” wrote Rick Reider and Russell Brownback.

If you’ve never played Jenga, it’s good fun.

You take one wooden block at a time from an existing tower (the stock market in this case) and put it atop the tower. The tower keeps getting taller, but it also keeps getting less stable.

Eventually it wobbles…and when the wrong piece is finally pulled it collapses in a big pile.

Like I said, good fun. At least when you’re playing with wooden blocks.

Not so much when you’re playing with your wealth.

More after the markets.


Overnight the Dow Jones Industrial Average closed down 129.58 points, or 0.50%.

The S&P 500 fell 15.19 points, or 0.55%.

In Europe the Euro Stoxx 50 index finished down 49.15 points, or 1.54%. Meanwhile, the FTSE 100 lost 1.24%, and Germany’s DAX closed down 250.06 points, or 2.17%.

In Asian markets, Japan’s Nikkei 225 is up 87.52 points, or 0.40%. China’s CSI 300 is up 1.75%.

In Australia, the S&P/ASX 200 is down 14.09 points, or 0.24%.

On the commodities markets, West Texas Intermediate crude oil is US$66.33 per barrel. Brent crude is US$76.34 per barrel.

That’s a 4.4% fall for Brent and a 4.2% drop for WTI since this time yesterday. We’ll return to this below.

Turning to gold, the yellow metal is trading for US$1,231.48 (AU$1,737.17) per troy ounce. Silver is US$14.75 (AU$20.81) per troy ounce.

One bitcoin is worth US$6,414.40.

The Aussie dollar is worth 70.89 US cents.

Higher risk for lower returns?

BlackRock’s managers and other mainstream analysts are getting nervous.

And with good reason.

When you put your hard earned money into stocks, you expect to see positive returns. Not every day or even every week…although that would be nice.

But over the longer haul, you want to be rewarded for the extra risk you take buying shares in a company rather than sticking your cash in a savings account.

That won’t mean share price gains for every stock in your portfolio. Though again, that would be nice. But put them all together and you want to handily beat the term deposit rate, currently around 2.4% in Australia.

If instead of being rewarded for taking the extra risk you lose money at the end of the year, you probably begin to think about lightening your stock holdings. And you won’t be the only investor thinking along those lines.

Hence the saying, markets take the stairs up and the elevator down. Meaning gains tend to be gradual and regular. But once the selling starts in earnest, stock market losses can stack up fast.

That’s not to say that some individual stocks haven’t been performing well.

Biotechnology stock CSL Limited [ASX:CSL], for example, is up 28.9% year-to-date. And this is an $82.9 billion company.

But overall the ASX/200 — despite the lift from CSL — is down 3.6% in 2018. Much of that pain has come in the past three weeks. The index has lost 4.9% since 3 October.

The Dow Jones has lost even more in three weeks, down 5.63% since 3 October. Though the Dow (and the other major US indices) is among the few managing to eke out a gain this year…up 1.9%.

European investors have generally fared even worse. The FTSE 100 is down 9.53% in 2018. Germany’s DAX is down 12.72% in that same time.

But before you send your condolences to Europe, spare a thought for investors in Chinese stocks. As with the ASX, there have been some big winners. But overall China’s CSI 300 is down 21.14% since 2 January.

Shorting, options, or ETFs?

If you have a crystal ball — or took heed of Vern Gowdie’s advice or the warnings from Harry S Dent — you may have avoided losing money this year.

There are also ways you can make money as the stock market or select equities — yes, I’m thinking oil here — go backwards.

Short selling is one way.

Short selling involves borrowing shares in a stock, generally from a broker, and selling it at market price. If the stock goes down, as you hope, you buy it back for less and give the shares back to their owner. You then pocket the difference.

Options are another way to go.

(To start trading options like the pros, you can join Matt Hibbard, our resident options expert, over at Options Trader. Details here.)

In a falling market, you’d likely be looking at put options.

A put option allows you to lock in a future price for a stock or other select equity at a certain price. This gives you the right, but not the obligation, to sell within the time frame of your particular option.

CSL stock, for example, is currently worth $182.88 per share.

If you believe the share price is coming down, you might be able to buy a put option placing the price at $185, if brokers and other investors believe CSL has further to run. If the share price falls to, say, $170, you can buy at that price and sell for $185. A tidy $15 per share gain, minus fees. How many shares you get depends on your contract.

A third way to play a falling market is with exchange traded funds (ETFs). Specifically, inverse ETFs. You can buy and sell shares in ETFs just like any other stock.

There are all kinds of inverse ETFs out there. Some are leveraged, meaning you can gain two or three times the amount that an index or commodity loses. Though it also means you can lose two to three times your investment. Always tread carefully with leverage.

Today we’ll limit our focus to two ETFs.

The first is the unleveraged BETA BEAR/ETF [ASX:BEAR]. BEAR is meant to move in the opposite direction of the ASX/200. And so it has…

As mentioned above, the ASX/200 is down 4.9% since 3 October. In that same time BEAR has gained 4.9%.

The second ETF we’ll look at is the double leveraged ProShares UltraShort Bloomberg Crude Oil ETF [NYSE:SCO]. If the oil price falls 10%, it’s intended to deliver a gain of roughly 20%. If the oil price rises 10% the ETF will lose around 20%.

Regular readers will know I’ve long been forecasting WTI crude will fall below US$60 before the 6 November US midterm elections. I won’t rehash all the rationale behind that forecast today. Largely it comes down to a thinly disguised global supply glut and a certain US president who’s been demanding the world pumps even more crude.

You may recall I suggested that you might want to investigate the ProShares UltraShort Bloomberg Crude Oil ETF back on 26 September. At the time WTI crude was trading for US$72.05. But the mainstream was spruiking a return to US$100 per barrel.

As Bloomberg reported on that day:


Major oil trading houses are predicting the return of $100 crude for the first time since 2014 as OPEC and its allies struggle to compensate for U.S. sanctions on Iran’s exports.’

I didn’t buy into that picture. I wrote to you that Russia and Saudi Arabia had more than enough spare capacity to make up for any losses from Iran and Venezuela.

Even the brutal slaying of journalist Jamal Khashoggi in the Saudi embassy in Turkey this month hasn’t seen crude surge, as the mainstream was predicting following initial threats from the kingdom to ‘weaponize’ their oil.

I didn’t buy into that picture either. Here’s what I wrote to you last Tuesday:

It’s no stretch to imagine King Salman will feel indebted to Trump for helping deflect suspicion from the crown prince. And that he could be prodded into repaying some of that debt by opening up the oil taps in time for the US November midterms…

And here’s what Bloomberg reported this morning:

Oil in New York slid more than 5 percent in Tuesday’s session as Saudi Arabia pledged to meet any supply shortfalls and as a risk-off sentiment spread throughout global markets.

Saudi Energy Minister Khalid Al-Falih said OPEC and its allies are in “produce as much as you can mode” to meet demand and replace any looming shortages due to Iranian sanctions.

Surprise, surprise.

So how has the ProShares UltraShort Bloomberg Crude Oil ETF been doing?

It’s up 14.9% since 26 September. And it gained 9.24% in overnight trading.

While I still foresee WTI to fall below US$60 in the next few weeks, I could always be wrong. If the oil price reverses on any of dozens of possible geopolitical fallouts, this ETF will lose money.

Last chance!

The clock is ticking to access Sam Volkering’s new research paper, the ‘Worldwide Microcap Challenge’.

As mentioned yesterday, Sam has expanded his hunt for tiny stocks with explosive potential from the ASX to a global scale.

But the doors to his new service, Microcap Global Trader, close at midnight tonight.

Investing in high risk and potentially massively rewarding tiny stocks in overseas markets isn’t for everyone.

You can find out if it suits your investing needs by clicking here.

Finally, here’s the latest on the slow road to censorship from The Australian Tribune:

‘Watchdog Looks to Expand Internet Censorship Powers’

In an ideal world the internet would be what it was intended to be. A place where any and all information can be shared freely.

In the real world there is a need to monitor and censor some of the material people attempt to post and exchange. But as with all such well-meaning efforts, this is the slipperiest of slopes.

Censors, after all, are employed to…’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

And it’s absolutely free.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

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