Saturday, December 13, 2008

Dealing with a Schizophrenic Market

On Thursday night after the auto bailout vote failed, Senate Majority Leader Harry Reid, "I dread looking at Wall Street. It's not going to be a pleasant sight." Yesterday, I fully expected the Senate failure to deliver an auto bailout bill to cause a meltdown in the stock market.

Boy was I wrong.

It seems the market no longer reacts as people might expect. After the Dow lost about 200 points at the open, the market ended up 64.59 for the day. Previously, on October 3, 2008, I bet on the market rallying after the $ 700 billion bailout bill passed, only to see my investments fall precipitously in the ensuing weeks.

While I was thinking an auto bailout would cause market to rally, I am definitely not sure. If the Bush adminstration provides a bailout loan, the market may fall as it did after the TARP bill passed on October 3, 2008. To hedge against the market falling, I added the Ultrashort Real Estate Proshares (SRS) and Ultrashort Financial Proshares (SKF) to my current holding of the Ultrashort Oil & Gas Proshares (DUG). These are inverse market index ETFs, meaning they rise when the market falls and vice versa.

Hedging in a Volatile Market
Inverse ETF [purchase date]SharesPurchase Price

Price on 12/12/08

Ultrashort Oil & Gas Proshares (DUG). [11/21/08]100



Ultrashort Financial Proshares (SKF)



Ultrashort Real Estate Proshares (SRS) [12/11/08]20



The stock market is definitely strange nowadays. Hopefully, it will rally if a bailout is announced next week. If the market falls instead, I will have a little protection through these inverse ETFs.

Disclosure: At the time of publication, I own shares of the Ultrashort Real Estate Proshares (SRS) , Ultrashort Financial Proshares (SKF), and Ultrashort Oil & Gas Proshares (DUG).

For more on Reflections and Musings , check back every Saturday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

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