Stay Short Europe and China

05/07/2012 9:45 am EST

Focus: ETFs

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and

Using exchange traded funds to short the two weakest sectors in the world has been an exercise in patience…but it will pan out, writes Doug Fabian of ETF Trader.

Stocks finished the final trading day of April on the downside, and the selling in that session resulted in the major averages experiencing their first monthly decline in seven months. After a stellar showing in the first quarter, stocks are finally doing what I suspected they would do, and that’s forming a top at current levels.

Of course, the action in April doesn’t mean that stocks can’t go higher from here. But what it does mean is that the unbridled enthusiasm for equities of all stripes is on the wane, and that means the next stage in this market’s evolution definitely could be dramatically lower.

For stocks in China and Europe, we’ve long since seen these respective sectors form a top. And though both sectors managed to gain ground during the past week, we still are in good shape with respect to our two leveraged short positions via the ProShares UltraShort FTSE China 25 (FXP) and the ProShares UltraShort MSCI Europe (EPV). As of end of April, we were down 8.24% in FXP and 4.87% in EPV.

I think any ramped-up news about concerns in Spain, the United Kingdom, France, and the European Union in general is likely to move the needle higher on FXP and EPV. As such, I want you to remain in both positions.

Another position likely to move higher on European weakness is the ProShares UltraShort Europe (EUO). As of end of April, we were down 2.39% in this fund, but I also expect to see its value bounce back on more European weakness.

As for our position in the iPath S&P GSCI Oil (OIL), the fund is down only fractionally (0.53%) since our original purchase. If oil prices fight their way back due to supply issues and the omnipresent threat of geopolitical risk, we are likely to see a big spike higher in crude prices, as well as in the value of OIL.

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