A LOOK AT SOME BEAR MARKET FUNDS
INVERSE FUNDS ... One of our readers asked which indicators to use when analyzing bear mutual funds. The answer is to use the exact same indicators that we use in the stock market. Bear funds are simply inverse funds. They're designed to move in the opposite direction of the stock market. A sell signal in the stock market is supposed to coincide with a buy signal in a bear fund (and vice versa). A buy signal signal in the S&P 500, for example, should coincide with a bear market sell signal. I was asked to comment specifically on the Rydex URSA bear fund. As you might expect, the RYURX (and all bear funds) have been rising recently as the market has been falling. Chart 1 is a daily chart of the RYURX (through yesterday). The chart shows the bear fund trading over its 200-day moving average and having broken a down trendline drawn over its August 2004/March 2005 peaks. That has turned its short- to intermediate-term trend higher.
Chart 1
Chart 2
WEEKLY MACD LINES TURN UP ... Over the weekend, I wrote that the weekly MACD lines for the stock market had turned negative. That means that the same indicator for the URSA fund should have turned positive. And it has. Chart 2 applies the MACD lines (and histogram bars) to a weekly chart of the URSA fund. The chart clearly shows the major sell signal (red arrow) in the bear fund that took place in the fourth quarter of 2002 when the market bottomed. Since the start of 2004, three MACD buy signals have been given. Notice the bullish divergence between the MACD lines and the URSA fund that's existed since the start of 2004. The third MACD buy signal has just taken place (green circle). The third signal is much more important than the previous two. The monthly MACD lines are also turning up.
Chart 3
MONTHLY LINES TURN POSITIVE... Chart 3 overlays the same MACD signals on a monthly chart of the bear fund. In the ten years shown, only three MACD line crossings have occurred. A buy signal occurred in 1998 and a sell signal in early 2003. The third one has just taken place and it's a buy signal. To the far right, the shorter MACD line has just crossed over the longer line and the histogram bar has crossed over the zero line. That's the first possible monthly trend signal given by this indicator in two and half years and the first possible buy signal in seven years. [The monthly buy signal is preliminary. An actual signal can't be confirmed until the end of the month]. If that monthly signal holds through the balance of October, it will be a bull signal for bear funds and a bear signal for the market.
PROFUNDS BEAR FUNDS ... ProFunds offers at least eight inverse (bear) funds which can be found on this site under the Profunds Carpet. A broader selection of their bear funds can be found at www.profunds.com. A number of their bear funds are ultra inverse funds. That means that they're designed to move twice as fast as normal funds and are a lot more volatile (riskier). Chart 4 shows the ProFunds Short Small Cap fund (SHPIX) through yesterday. It's been one of the bear fund leaders over the last week and has just crossed over its 200-day moving average.
Chart 4
BEAR FUNDS ARE TRADING VEHICLES... Bear market funds aren't for everybody. But they do provide a way to hedge your portfolio against a serious market decline or to profit by such a decline. If the market falls, bear funds will rise. Remember, however, that bear market funds will only work if the market continues to decline. They should be viewed more as trading vehicles than as a long term investment. That means that bear positions need to monitored very closely in case of a market upturn. Use the same short-term indicators to monitor bear funds that you use on any other market.
