BEAR MARKET STRATEGIES
by Robert R. Prechter, Jr
These strategies are general by necessity. The risks vary, and so does the amount of money required. Your choices
should be guided by your own desire for safety or gain and your belief as to the depth and longevity of the bear
market. Also, be sure to consult The Elliott Wave Financial Forecast and The Elliott Wave Theorist to get a handle
on the current state of the market. Changes can be rapid.
#1 Make sure that your investment capital is not invested “long” in stocks or stock mutual funds, especially in your
retirement plans if switching is restricted.
#2 Two excellent “parking places” for many people are U.S. Treasury bills and money market funds that specialize in
near-term federal government debt instruments. Later, these might be risky, but for now, they should be fine.
#3 A good inverse index fund is Bear ProFund [BRPIX] (Maryland, 888-776-3637), which has a lower minimum
investment than its competitors and allows telephone switches between funds later in the day than its chief competitor.
(Call ProFunds and mention EWI to get an expedited prospectus.) Bear ProFund goes up in value as S&P
futures fall in value, and vice versa.
Inverse index funds like Bear ProFund are bets on falling stock prices. Holders of these shares can make more than
50% each time the index gets cut in half, and they typically would lose only 50% of their money if the index
doubles. Bear index funds were by far the best fund investments in 2000, and the stock market has several more
down years to go.
ProFunds offers money funds and “long” index funds too, so you can easily move your money to take advantage of
swings in either direction or “park” it for safety.
If you use a bear fund, you must time your entries and exits well. Reverse compounding can leave you disappointed
if you are early or if the markets are choppy. Here is an example exaggerated for simplicity. Let’s say both the index
and the inverse fund close at 100 today. Tomorrow the index gains 50%, closing at 150, so the fund loses 50% and
closes at 50. Then on Day 3, the index loses 33%, closing back at 100 again, but the fund, in gaining 33%, goes
only to 67 – a seeming performance gap of 37 points.
The reason for the gap is that these inverse funds attempt to mirror the percentage changes in the correlated indexes
on a daily basis, not a long-term basis.
But compounding works to your advantage when markets are trending persistently in your favor. Using our exaggerated
example again, we start with an index and a fund value of 100. Tomorrow the index loses 50%. The index
stands at 50; the fund at 150. But the next day the index loses 50% again. The index now drops to 25, and the fund
rockets to 225. So the index has lost 75%, but the fund has gained 125%. It’s this last feature that makes bear index
funds like Bear ProFund attractive.
To keep your gains, you need to exit at the right time. We recommend that if you use inverse index funds, you buy
them directly from the fund company and apply the saved commissions to a subscription to Steve Hochberg’s Short
Term Update so you can time your purchases and sales. Call the office for information at 800-336-1618 or go to:
www.elliottwave.com/products/stu/index.htm.
Rydex offers the Arktos Fund [RYAIX] (800-820-0888), which moves opposite the NASDAQ 100 Index.
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