• Daryn Fleming, Ph.D

Making Money in Red Markets

It is tough to make money with investments when markets are clearly moving in the wrong direction. For the first time in 2017, we have a large pullback and the major market indices are selling off. The cause of today's selling appears to be the uncertainty of the President Trump and his administration. It is unfortunate that the President cannot seem to get over a difficult transition phase. This is weighing on the market.

Regardless of what the cause, markets do turn red. We forget about those days during times when the market runs up. Historically, April and May rank among the poorest performance months of the year. Short term investors get hit particularly hard because they make their living from the markets. When the markets are selling off the short term techniques become critical. You could say that we get to see what a day trader is made of during the ugly selloffs. The good news is you can still make money with your investments no matter what direction the markets are moving. Today we are going to discuss this.

There are essentially two options for investing during a bad phase. One option is to take a vacation from investing and just watch the market and focus on the news until the storm clears. April and May are terrific months to take some time off. The other option is to continue your trading and use some of the different techniques. Investors who cannot take the time off must look at such options.

Fortunately in options investing we can easily take short positions. Shorting is the exact opposite of going long. Short investors take a position in an asset or market and make money as the markets move lower. On days where selling runs rampant this method works like clockwork. The investor simply uses the same tools he regularly uses but focuses on the opposite direction.

However, shorting is not as easy as it looks. Markets can gyrate all over the place. Investors who short have no friends, as most mutual funds and large investment funds are not allowed to go short because they have different rules. So what we think should be a great set up for a short trade can turn quickly against us. In others words, most of Wall Street is fighting this short direction.

Fortunately, there are other markets other than the U.S. stock markets. The currencies offer a terrific alternative. Currency pairs move up and down regardless of what stock markets are doing. Plus the foreign currencies trade 24 hours a day. Another alternative is gold, oil, silver or other commodities. Many of these assets typically move in an upward direction while stocks markets pull back.

So, you do have plenty of options to make money, even while stocks are moving down. The reality is that we do not short very often, especially when the market is in a longer term uptrend. You will see an occasional short position, but often only as a test. Once we can confirm that stock markets are in a legitimate bear market you would see many more short trades. Happy Investing!


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