NO MAJOR BUY SIGNAL YET IN BEAR MARKET FUND -- GUIDELINES FOR SHORT SELLING
BEAR MARKET FUND HASN'T GIVEN MAJOR BUY SIGNAL YET ... I've received a number of questions about buying a bear market fund to profit from a falling stock market. I've also been asked to write more about short selling in general. Let's start with a bear market fund. As the name implies, a bear market mutual fund does well in a bear market. It's designed to move in the exact opposite direction of the stock market. Chart 1 shows the last year's trend for the S&P 500 which is most often used as the benchmark for the U.S. stock market. Below it is the Rydex URSA (RYURX) bear fund. As you can see, they trend in opposite directions. In a bull market, you want to own a bull market fund. In a bear market, you want to own a bear fund. Simple enough. The trick is deciding whether we're in a bull or a bear market. When analyzing a bear fund, we apply the exact same technical indicators that we do to the S&P 500. We just reverse them. In other words, a major "sell" on the S&P 500 should coincide with a major "buy" signal in a bear fund. Let's see if we're getting the latter.
Chart 1
Chart 2
LONG-TERM VIEW OF BEAR FUND... The monthly chart of the Rydex URSA bear fund is showing improvement, but has yet to give a major buy signal. The monthly stochastic lines along the top are starting to level off in oversold territory under 20. That's a positive sign. The monthly MACD lines along the bottom are converging (which is a good sign) but have not yet crossed into positive territory. The last MACD sell signal was given near the start of 2003 as the stock market bottomed (see red arrow). The MACD (green) histogram bars shows that the "spread" between the two MACD lines is the narrowest in almost two years. That's usually a prelude to a bullish crossing. But that bullish crossing hasn't taken place yet. The blue lines around the price chart are Bollinger bands. The dashed line in the middle is the 20-month moving average. The RYURX needs to rise above that dashed line (currently near 9.5) to signal a new uptrend.
Chart 3
INTERMEDIATE TERM VIEW LOOKS BETTER... The weekly bars of the Rydex URSA fund are also showing improvement. The weekly stochastic lines have already turned up from oversold territory under 20. The weekly MACD lines are very close to doing the same. Notice the positive divergence between the price chart and the MACD lines. Although prices fell to a new low during the fourth quarter, the weekly MACD stayed well above their early 2004 lows. That creates a "positive divergence" between the two. Although no bullish crossing has taken place on the two MACD lines, they're very close. The dashed blue line on the price chart is the 20-week average. Here again, the RYURX needs to cross above that line to turn the "intermediate" trend upward. While the technical indicators are improving, no buy signal has been given yet on the weekly chart.
Chart 4
DAILY CHART HAS TURNED UP... Since the daily chart is always more sensitive than the weekly and monthly charts, that's where the trend improvement always shows up first. And Chart 6 shows the "short-term" trend of the Rydex URSA fund turning up. The chart is plotted through yesterday's (Wednesday's) close. It shows the RYURX trading over its 50-day moving average. It also shows the 14-day RSI and daily MACD lines having broken down trendlines starting at their August peaks (see up arrows). All that tells us, however, is that the short-term trend is rising. It doesn't indicate a major upturn yet. For that to happen, the RYURX still has to break its August/November down trendline -- and close over its 200-day moving average. In addition, either the weekly or monthly charts have to issue buy signals. Chart 6 shows a point & figure chart of the bear fund (each box represents a 1% price change). The p&f chart shows that the RYURX has to get all the way to 9.4 to reverse its current downtrend. It would have to rise to 8.77 just to score a three-box reversal to the x (up) column. That's the first thing that needs to happen to signal any short-term improvement. To summarize, the short-term trend of the Rydex URSA bear fund has turned up. For aggressive traders, that may be enough to warrant a small position. For longer-term investors, however, there doesn't seem to be sufficient evidence yet to warrant going "short" the market.
Chart 5
Chart 6
REVERSE THE RULES FOR SHORT SELLING ... Some have asked why I don't recommend short positions. That's due to my belief that most investors either aren't comfortable with selling short, or would have more difficulty dealing with that riskier form of trading. But that's not true for all. For those more experienced traders who wish to do some short-selling, the rules are relatively simple. Just reverse the concept of relative strength. As you know, I advocate buying market sectors, industry groups, or individual stocks that show relative "strength". For short selling, what you need to do is short the markets that are showing relative "weakness". You can use the same rankings for either approach. Instead of buying the gainers (like consumer staples or energy), you'd could be short the losers (like technology). Instead of using technical indicators to find "buy" signals, use the same indicators to find "sell" signals. Just reverse the process. Make sure, however, that if you do short something on an indicator sell signal, that you buy it back when that same indicator turns positive.
