Daily Gains Letter

If History Repeats Itself, It’s Time to Bet Against the Markets

By for Daily Gains Letter |

Time to Bet Against the MarketsAfter a strong July, the S&P 500 is looking like it is in correction mode, trading down more than three percent since the beginning of the month and effectively erasing the last two months’ gains. It’s quite possible that the corrective phase could last until early October—that is, if history, looming economic news, and geopolitical issues have anything to say about it.

And that could present a number of interesting opportunities for investors who like to bet against the stock market.

Since 1940, the stock markets have generally performed the worst in September; that doesn’t just include the U.S., but also Germany, Japan, and the U.K. In fact, for the S&P 500, September has posted the worst monthly returns going all the way back to the 1920s. September is even crueler on the Dow Jones Industrial Average, showing a negative bias going back to 1896.

Historical metrics aside, there is a lot of economic news coming out, and a number of looming global events that could add insult to injury. The Federal Reserve could begin tapering its $85.0-billion-a-month quantitative easing policy sooner than later, especially in light of last Thursday’s encouraging economic news that saw U.S. jobless claims drop to their lowest level in six years.

Negative overarching economic news continues to plague the U.S., but chances are that the Federal Reserve will focus on the positive to justify the pullback—it’s what they do. Since many believe the quantitative easing has been fuelling the U.S. bull market, too much good economic news could put a damper on things. That could translate into a further correction on the S&P 500 and Dow Jones Industrial Average.

Further market volatility could come on the heels of political and economic news out of Germany, Europe’s largest economy. Germans head to the polls in September to elect a new government, and any shift in power could change the direction in which the country is heading economically. As one of the United States’ largest trade and investment partners, the outcome in Germany is also important to American investors.

This is especially true when you consider that Germany is the main economic rudder of the eurozone and that the U.S. and Europe are each other’s primary source and destination for direct investment. In 2009, the most recent year for which data is available, Germany and Europe accounted for more than 60% of the inward stock of foreign direct investment (FDI), and more than 75% of outward stock FDI worldwide. (Source: “EU-US Facts & Figures,” Delegation of the European Union to the United States of America web site, last accessed August 20, 2013.)

With a lot of economic news about to be unleashed ahead of the weakest trading month in the year, it might be a good idea for investors to consider taking a defensive stance. That could mean either shorting U.S. exchange-traded funds (ETFs) indexed on the S&P 500 and Dow Jones Industrial Average or purchasing ETFs that trade inverse to those two indices. Alternatively, investors could look at investments that offer protection from volatility, including large-cap defensive ETFs.

The rippling effect of economic news could have a negative impact on the U.S. markets in the coming weeks. Fortunately, there are a number of great ETFs out there for investors looking to fortify their portfolio if the economic news eventually reports that the market faces a correction.

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