How to Make Money if the Market Falls

Today’s massive rally was quite a change from the equally dramatic sell-off we experienced on Tuesday. The equities and metals bull market and the plummeting U.S. dollar have ruled the day for some time, but their time may be up, at least for a few weeks.

After the exuberance over today’s General Motors Corporation (NYSE: GM) IPO wears off, it is highly possible that traders and investors will slowly pull money off the table to lock in gains or cut losses, and re-evaluate the overall market condition before stepping back up to the plate and taking another swing.

The most important thing is to trade with the trend, and if that trend does happen to be down in the short term, here are four exchange-traded funds (ETFs) that could make you a profit in a falling market.

TBT Treasury Note Inverse Fund

The ProShares UltraShort 20+ Year Treasury Fund (NYSE: TBT) fund moves inverse to the price of the 20-year Treasury note. So when this bond fund goes up, it actually indicates bond yields are falling. Looking at the chart, you can see the recent reversal that took place, and we had a great entry point shortly after that reversal.

Falling bond prices are considered to have a negative impact on equities because it implies that interest rates may start rising, which means more investors will pull money out of stocks and put that money into safe, interest-earning investments. And you will typically see bonds change direction before equities.

UUP U.S. Dollar Index Fund

The PowerShares DB US Dollar Index Bullish Fund (NYSE: UUP) moves with the U.S. dollar and allows equities traders to take advantage of currency trading.

The chart below shows a possible trend reversal for the dollar. If the dollar continues to rally, then it’s a good sign that interest rates could be rising in the near future, and it also means more downward pressure on equities.

SDS Inverse S&P 500 Index Fund

Bear funds like the ProShares UltraShort S&P500 (NYSE: SDS) make it possible for traders and investors to profit from a falling market using a regular buy-and-sell strategy. They can also be traded in retirement accounts making them a golden investment for those willing to play a falling market. This chart moves the same as the S&P 500 index only flipped. As the S&P 500 falls, this fund rallies.

The strategy we just used to play the recent rally is the same strategy we will use during a bear market, but instead of trading the SPDR S&P 500 (NYSE: SPY), we are trading this fund. It is important to note that while bull market rallies tend to drag on, bear markets typically have faster movements. Fear is much more powerful than greed, which is why the stock market drops quicker than it goes up.

GLD Gold Exchange-Traded Fund

Gold, as evidenced by the SPDR Gold Shares (NYSE: GLD), also looks to be topping and could actually be starting to form a head-and-shoulders reversal pattern. You can play a short-term fall in gold by buying put options on GLD.

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