Fabian's Bearish Bets
03/25/2005 12:00 am EST
VIP Investor is a sophisticated, specialized service from mutual fund expert Doug Fabian. Rather than focus on overall portfolio development, the service seeks high rewards via shorter-term, higher risk positions. Here, he offers two bearish bets on market.
“We recently passed the five-year anniversary of the NASDAQ Composite's all-time closing high of 5,049. Now, five years later, the NASDAQ is still down almost 60%. The question now is, can drops of this nature happen again? The answer, of course, is yes; anything's possible. In fact, with long-term interest rates finally moving upward, we could see the real estate market finally burst with financials losing serious ground as well. The S&P 500 is heavily weighted in financial stocks, so we could see a pullback there as well.
“While moves akin to those in 2000 were painful, VIP Investors are prepared for any kind of downturn. To protect against downmoves, we recommend that VIP investors purchase positions in ProFunds UltraShort Small Cap (UCPIX) and Rydex Dynamic Venture (RYVNX). ProFunds UltraShort Small Cap seeks to provide investment results that correspond to 200% the inverse of the Russell 2000 Index (small caps). Rydex Dynamic Venture corresponds to 200% the inverse of the NASDAQ 100.”
“It doesn't take much— just a 2% or 3% move down translates into a 4% or 6% profit in these positions, due to our double-leveraged position. (Just remember, these positions also have double the risk, should be market go up.) A similar scenario holds true for the NASDAQ 100. Back on the 22nd, it closed at 1494.07, 3.8% below its 50-day and 1% above its 200-day. The last time the NASDAQ 100 fell below these two moving averages, the index went on to decline 10%, equivalent to a 20% gain for Rydex Dynamic Venture. It also came close to hitting its key short-term support level of 1480. The same profit potential holds true for this position as with our Russell 2000 fund with respect to penetrating its support level. Keep a close eye on those support levels. We could be in for a wild ride if either dip below those levels.”