Short Stocks, Avoid Gold

10/30/2008 1:00 pm EST

Focus: OPTIONS

Doug Fabian

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

Doug Fabian, editor of Making Money Alert and ETF Trader, advises shorting stocks and staying away from gold until the market settles down.

I do think we’ll have a great buying opportunity in stocks once the real bottom has been formed, but until then I don’t want to try and pick spots on the upside. Having said this, however, I do think that if stocks managed to get a bit higher, we may be looking at a great shorting opportunity.

Remember that in an ailing market environment like we’ve had over the past year, solid moves to the upside are most often followed by significant moves to the downside. Capturing gains from a declining market is, I think, going to be our next winning trade.

But where there is volatility, there is also opportunity.

In my opinion, the action during the next couple of weeks will be to the downside, as investors scramble to take shelter from the storm of poor earnings announcements and the uncertainty of who will win the presidential election.

Let’s take advantage of what I think will be a sustained downward pressure on this market—at least until November 4th—with two new double-short ETFs. As soon as you receive this e-mail, I want you to buy the UltraShort Dow 30ProShares (Amex: DXD) and the UltraShort Russell 2000 ProShares (Amex: TWM).

Both of these funds are 2-beta short funds, meaning they move twice the inverse of their respective indexes. In the case of DXD, you get performance equal to twice the inverse of the daily performance of the Dow Jones Industrial Average. With TWM, you get performance equal to twice the inverse of the Russell 2000 index.

In real terms, that means that if the Dow falls 2%, DXD will rise 4%. In the case of TWM, if the Russell 2000 falls 2% then TWM will rise 4%.

[Meanwhile,] if you are thinking about investing in gold, I advise caution for now. Gold is showing no clear sign of an upward trajectory. With the economy appearing to slow, inflation is not the only threat on the financial radar screen. Sure, you can keep potential gold investments in mind for when the time is right. But I personally don't think that window of opportunity has opened yet.

Should you rule out any exposure to gold right now? Well, that call is up to you. The price of gold has fallen [almost] 20% since topping out earlier this month at $918 on Oct. ninth.

What happened? Well, the gold sector can become overbought at times—especially when investors look to protect themselves from inflation. A rising dollar also can hurt gold prices and that factored into the commodity's decline in value this month.

I understand that many investment commentators consider gold to be a hedge against the current market volatility. Well, the price of gold has not held up. This situation may change, but it hasn't yet. For that reason, it seems premature to make a big bet on gold.

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