Ahead of the earnings season, the market does look vulnerable.
Today, the Dow is off 162 points, and the Nasdaq is down 50 points. There are some hot stocks that have plunged as well, such as Bed Bath & Beyond (NASDAQ:BBBY). It’s down 15% in today’s trading. So might there be further deterioration in the markets?
While Europe gets a lot of attention, there’s certainly more to be worried about. Essentially, it looks as though the global economy is slowing down, as seen in countries such as China and Brazil. As demand trails off, it’s going to be tough to sustain robust equities prices. At the same time, commodities will likely be weak.
How to play these trends? Here’s a look as some short-sale ideas:
ProShares UltraShort S&P 500 (NYSE:SDS). For every 1% drop in the S&P 500 Index, this ETF will increase by 2%. Yes, it’s a way to leverage a decline.
And yes, a Goldman Sachs (NYSE:GS) analyst — Noah Weisberger — is forecasting a drop in the S&P 500. The main reason is that the U.S. economy appears to be worsening, as seen in the gloomy Philly Fed report. The Federal Reserve also appears to be holding off on easing monetary policy. As a result, Weisberger thinks the S&P 500 could drop about 5% or so.
AdvisorShares Active Bear ETF (NYSE:HDGE). This is a new fund, but it has had a decent track record. Over the past three months, the return is 16%.
This ETF shorts stocks based on looking for accounting shenanigans, technical analysis and over-optimistic earnings expectations. All in all, the fund has spotted some great picks, such as Mountain Coffee Roasters (NASDAQ:GMCR).
HDGE, which has $278 million in assets, also has a reasonable expense ratio of 1.85%.
SPDR Gold Shares (NYSE:GLD). Gold has been weak this year, with the return unchanged. Even with the instability in Europe, there has not been a flight to the precious metal, which has cast some doubt on its status as a “safe haven.”
Gold has also traditionally served as an inflation hedge. But where’s the inflation? If the global economy is slowing down, then there will likely be deflationary pressures — which could mean further selling of gold.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.