It will be interesting to see if the market finally sells off after this week’s highly anticipated news. As expected, the Republicans smashed the Democrats in the midterm elections by taking the House of Representatives, but fell short of also taking the Senate. The GOP also won several Governships as well. Of course this was expected by almost everybody, so the market will be put to the test to see if it can hold its huge gains.
The other huge news was the Federal Reserve’s meeting and its announcment that it will pursue another $600 billion of quantitative easing, commencing with $75 billion per month. The general expectation among traders was something in the ballpark of $500 billion. The market whipsawed around like a drunk college kid after the announcement but then settled higher as usual. It’s hard to see the market continue to go straight up after this without at least a decent correction to keep investors honest. It is usually a red flag to see it this easy to make money on the long side.
TZA
My prefered method of playing downside action is using a levered ETF called TZA. The official name is Direxion Daily Small Cap Bear 3X Shares (TZA) and is not for the faint of heart. Theoretically it is supposed to rise 3% for every 1% fall in the Russell 2000 index, which is a proxy for small cap stocks. It has been a terrible play lately as the market has roared higher, but a hearty pullback should juice these shares in the near term.
I prefer playing TZA to shorting because I hate using margin and exposing myself to the unlimited loss potential that is inherent in shorting. You are also responsible for paying dividends when you are short a stock. There are horror stories of people losing all their money and more because they shorted at the wrong time and failed to cover, only to watch their stocks soar through the roof against them.
Of course, TZA is not without risks, so be careful if you decide to play it. It is extraordinarily volatile and is not suitable investors, but will do very well once this market finally cools off. It could be a nice hedge if you have a portfolio full of winners, but want some downside insurance. For the record, I did start a small position in TZA following the Fed announcement, but am still a little leary of this market’s inability to want to take any kind of breather. One day that will change and change dramatically, and nobody really knows when that will happen.
Playing the Downside is an article from: 
