The S&P 500 has rallied approximately 5% in the first four weeks of the New Year and is sitting near a multi-month high. The index is up roughly 20% from the recent low set on Oct. 1, 2011. This is a sign that stocks are back into an official bull market. Everything seems to be pointing to a trend that will probably continue for a few months. (For related reading, see Digging Deeper Into Bull And Bear Markets.)
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

However, the major indices are overbought and there is a high probability of a pullback heading into February. It would not be unhealthy if the S&P 500 were to incur a 5% sell-off that would bring the index back to its breakout area and at the same time, keep the uptrend intact.

Whether you are a bull and believe in higher prices in a few months or a bear that believes the current rally is over and a new downtrend is around the corner, there are a few ETFs that should benefit from weakness in the overall market.

Short ETFs
An ETF that will simply give investors the inverse of the S&P 500 on a daily basis is not a bad way to protect a portfolio or profit from selling. The ProShares Short S&P 500 (ARCA:SH) does just that for an expense ratio of 0.9% annually. Keep in mind that due to compounding the returns for SH over time, they may not match the exact return of the inverse of the S&P 500 over the same time frame. Most inverse or leveraged ETFs are better used for short-term trades or hedging.

The Market Vectors Double Short Euro (ARCA:DRR) is a two-times leveraged inverse ETN that will rise 2% in value on a day that the euro falls by 1% and vice versa. Over the last few months, whenever the stock market has fallen, it has been related to issues in Europe that also bring down the currency. For example, when the S&P 500 fell close to 20% from early May through late September last year, DRR was up almost 20%. The ETN creates a hedge against trouble in Europe. (To learn more, read A Beginner's Guide To Hedging.)

The United States Short Oil Fund (ARCA:DNO) seeks to offer its investors in percentage terms the inverse return on the spot price of light sweet crude. If a pullback occurs, it will likely be brought on by news of a global economic slowdown and therefore it will lower the price of oil and push DNO higher. During the near 20% sell-off in the S&P 500 last year (as mentioned above), DNO gained approximately 40% and was a great hedge.

Fixed Income
The Vanguard Intermediate Term Bond (ARCA:BIV) is a mix of government-issued and investment grade corporate bonds. The average maturity is 7.3 years and it has a 30-day SEC yield of roughly 2.29%. The yield is not overly attractive, but as money flows out of equities the ETF should attract money and at the very least hold steady and preserve capital during a sell-off. During the near 20% market sell-off last year, the ETF was up more than 5%, not including the monthly dividends.

The Bottom Line
As I mentioned above, if you are a bull on this current market, the pullback will likely be short and sweet if you are right. On the flipside, if the bears are right, the selling will likely last a few months and have a much bigger downside. The bears could buy the ETFs mentioned, then hold and wait for the pullback. The bulls that consider the ETFs must be nimble and time the market, which can be very difficult for the average investor. (For additional reading, see 3 Steps To A Profitable ETF Portfolio.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  2. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  5. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  6. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  7. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  8. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  9. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  10. Home & Auto

    5 Mistakes That Make House Flipping A Flop

    If you're just looking to get rich quick, you could end up in the poorhouse.
  1. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  2. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  3. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  4. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  5. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  6. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>

You May Also Like

Trading Center