New Short Signal for Stocks and ETF’s

After a few months of choppy markets, we have finally received a Very Bearish sell signal on all of the stock market indexes. How do we know this? Because both the long- and short-term trend arrows have turned bright red, or Very Bearish.

It pays to be patient

Over the past couple of months, we talked about how the market would eventually pick a direction, either up or down. This Friday, it looks like the market may have done just that. While we don’t know how long or far the market may drop, we must follow our rules. When the Wizard’s MarketTrends give us a direction, we must follow our strategies and take new trades – always in the direction of the trend, of course.

I believe the market will likely take out the lows it made back in November. But given the current environment, it’s possible that the market could fall as low as 5,000 or 6,000 on the Dow. Will this actually happen? Nobody knows, which is why it’s important to follow our MarketTrends signals -so that you’re positioned on the right side of the market, no matter what it does.

So what now?

Now is the time to do one of two things. We’ll explain both options in detail:

1. Look for short trades

2. Go to 100% cash.

Looking for short trades

Many of you may still be holding short positions that were initiated last fall. Because MarketTrends has now issued a Very Bearish signal, it is advisable to stay in those positions.

This is also a good opportunity to look for new short positions, and there are a number of ways to do this.

1. Sell stocks short in the weakest sectors

Remember, The Wizard ranks all stock sectors from strongest to weakest. Simply go to our “Browse Sectors” section and find the weakest sectors by looking at the bottom of the list. It’s also important to remember that you do not want to short any sectors that are exhibiting strength, which means that any sector with a Bullish green trend arrow (either long- or short-term) isn’t a good trade right now. Instead, stick to the sectors that have Very Bearish trends. There are currently 7 of 9 sectors showing these double red trend arrows, with Conglomerates and Financials being the two weakest. (Even though 7 sectors all have Very Bearish trend signals, The Wizard ranks all of them by trend. Those sectors at the bottom of the list are the weakest.)

From here, you can filter for the weakest industries within those sectors, using the method we just described. Once you’ve located those industries, simply find the weakest stocks (again, those with Very Bearish trend signals). Finally, filter your scans for Pre-Sells only. This will give you a list of stocks that currently have Wizard Sell signals on them. Remember, you never want to sell short a stock if there is no Pre-Sell signal on it.

2. What if I’m not comfortable shorting stocks? Use ETF’s.

No problem. If you’re an ETF subscriber, there are a number of ETF’s known as inverse ETF’s. These ETF’s profit when the market goes down. But you don’t sell them short. You buy them, just like you would buy anything else. For example, the symbol “SH” is the Proshares Short S&P 500. When the S&P 500 goes down, this ETF goes up. You can see a list of our inverse ETF’s here >

3. Use our PowerScans to find short trades.

The Wizard’s PowerScans do all the work for you. Given our Very Bearish market signal, use either the Power TrendChange Sell or Power TrendRetrace Sell scans for either stocks or ETF’s. Just remember to only trade the stocks or ETF’s that have Very Bearish trends (double red arrows).

Go to 100% cash

I realize that some of you may be skeptical about this option, but let us emphasize that this is a perfectly viable and very intelligent option. There are a number of very smart and successful investors who did not short the market this past year. Instead, they stayed in cash and, unlike the overwhelming majority who lost their shirts, these investors lost nothing.

If you are uncomfortable with shorting stocks, protect your capital and place it in the safest cash account you can find. These include cash money market funds guaranteed by the U.S. government, short-term Treasury money funds or through the direct purchase of short-term Treasury bills. Wherever you put your cash, one thing this past year has shown us is that it is critical that you perform your due diligence. We’ve simply offered some suggestions, but it is up to you to protect your money, so please do the necessary research. Being in cash simply means that you get to keep your money and play another day. And there’s nothing wrong with that.

Two more tips

1. Many of the stocks and ETF’s have already been beaten down quite a bit over the past year, so you’ll notice that many of them have Pre-Sell signals at $10.00 or less. Trading lower priced stocks is typically riskier, as these stocks tend to be more volatile. If you’re not comfortable with this level of risk, select stocks or ETF’s above $20.00. It’s important that you only trade the way you’re comfortable. The Wizard is set up for you to do just that, and if you’re ever uncomfortable or unsure about something, the best strategy is to stand aside and protect your capital.

2. If you want to get back into the market but want to keep your risk low, only take trades with tight stops – trades in which the entry price and stop price are close together.

For those of you who are new to the Wizard…

2008 was a great year for us. During the course of the year, we received 4 Very Bearish and 1 Very Bullish signal on the stock market. This gave us 5 tremendous opportunities in all. If you had simply traded the S&P 500 index, each of the Very Bearish signals would have resulted in at least a 30% gain from selling short, while the Very Bullish signal yielded a 10% gain from going long.

Here’s the record of our MarketTrend signals for 2008:

(Click on image to enlarge)

A new start for the New Year

If you