BEAR MARKET FUNDS ARE BREAKING OUT TO THE UPSIDE -- THEY OFFER THE BEST WAY TO PROFIT IN A BEAR MARKET

REVISITING RYDEX URSA ... Back on April 5 I wrote a piece on bear funds (April 05, 2005). Part of the headline was that no major buy signal had taken place. That's no longer true. Last Friday I recommended buying (or adding to) any bear fund that closed over its January high and/or its 200-day moving average. Most of them have cleared at least one of those hurdles. Some have done both. That earlier piece focused on the ProFunds bear funds. But I also took a close look at the Rydex URSA Fund. Let's start there. [All of these mutual fund charts are posted through Thursday's close. But given Friday's market losses, odds are good that bear funds will have another strong day]. Chart 1 shows the RYURX closing over its January and March highs to close at the highest level in nearly six months. A close over its 200-day moving average (which I believe will happen) will confirm the upside breakout in this bear fund. Chart 2 is an updated version of the one that I posted on April 5. It shows the RYURX finally breaking through a down trendline drawn over its August/October highs. Bear funds move inversely to the stock market. With the major market averages breaking down, most bear funds are breaking up. Bear funds allow an investor to profit from a falling stock market.

Chart 1

Chart 2

PROFUNDS BEAR MARKET LEADERS ... The April 5 article showed how to find and chart the eight inverse mutual funds offered in the ProFunds Carpet. At the time, I used the Market Carpet to highlight the three top performing ProFunds bear funds over the prior two months. They also happen to be this week's leaders to the upside. The top performing bear fund (which I showed yesterday) is the ProFunds UltraShort OTC Fund. Chart 3 shows the fund (through Thursday) having broken decisively through its 200-day moving average and trading at a new 2005 high. That's not surprising considering that it's based largely on the Nasdaq market which has been the weakest part of the market (Chart 4). As you can see, the two are mirror images of each other. Bear funds based on small caps are also doing better.

Chart 3

Chart 4

PROFUNDS SHORT SMALL CAP INDEX MIRRORS RUSSELL 2000 ... Chart 5 shows the ProFunds Short Small Cap Fund (SHPIX) (plotted through Thursday) having also broken through its January high and its 200-day moving average. Here again, that shouldn't come as a surprise considering that small caps have been falling harder than large caps. Chart 6 shows the Russell 2000 Small Cap Index having also fallen beneath its January low and its 200-day average. Large cap bear funds are also breaking out.

Chart 5

Chart 6

ULTRASHORT DOW 30 BEAR FUND BREAKS OUT ... Chart 7 shows the Dow Industrials having fallen beneath its January low and its 200-day moving average. It's next downside target is its October low (more on that later today). Since the ProFunds UltraShort Dow 30 bear fund is based on the Dow, it's breaking out to the upside. Chart 8 shows that bear fund closing over its 200-day moving average on Thursday. Unless the Dow recovers from heavy losses this afternoon, the Dow bear fund should end the week well over its 200-day line. I don't mean to suggest that these are the only bear funds to look at. With the market breaking down, all or most bear funds should be breaking out at this point. These are just samples of some upside leaders in the bear fund category. When the major averages are in a bear market, there's no better place to be than a bear market fund.

Chart 7

Chart 8