While many investments shot higher in 2013, most commodity markets dropped like a rock. The PowerShares DB Commodity Index Tracking ETF (ARCX: DBC) lost 8% in 2013, another 3% in the first week of January, and is now trading at a 20-month low.
This should not have caught you off guard. We’ve been trumpeting warnings about the strongly bearish trends in commodity markets ever since the 2011 peak. And subscribers to our flagship newsletter, Boom & Bust, and my VIP investment service, Cycle 9 Alert, were not only warned of the downward spiral in commodity prices… they were shown ways to profit from the downturn.
Playing the short side of markets – by making bearish bets via short sales and put options – is a great way to hedge a portfolio of bullish positions, ideally smoothing out your portfolio’s equity curve during turbulent times. What’s more, an investment strategy that relies on short positions is vital during downturns and secular bear markets.
In baseball, switch-hitters have an advantage over purely right-handed or purely left-handed batters. They’re able to bat left-handed against right-handed pitchers and vice versa.
Basically, switch-hitters hold an advantage in their ability to be flexible and adapt. Investors should take a cue from this.
Just as stock buyers are prone to “buy dips,” playing the short side of markets requires learning how to “sell rallies.” Of course, selling short-term rallies is typically only profitable when the longer-term trend is bearish.
Take Southern Copper Corporation (NYSE: SCCO) as an example of this technique in action. Here’s a chart of SCCO going back to the start of 2013:
I don’t talk about it often, but I have an algorithmic indicator that mathematically predicts cyclical peaks (which I’ve marked with pink and red dotted lines above), providing a timely warning of declining prices.
As you can see, these cyclical peaks work very well in identifying exactly when to make a bearish bet, essentially selling into short-term rallies.
I’ve recommended betting against Southern Copper in both Boom & Bust (May 2013) and in Cycle 9 Alert (September 2013). Both recommendations were precisely timed to take advantage of short-term cyclical peaks (within a longer-term bearish trend).
And these positions have done well for us. The short position in the SCCO stock held in our Boom & Bust portfolio is holding on to an open gain of 16%. And Cycle 9 Alert subscribers have already locked in gains of 38% and 82% by executing a very simple bearish options strategy.
So, if you’re naturally inclined to buying dips and can only see the markets from one side of the field (the long side), consider what you may be missing in not maintaining the flexibility of a switch-hitter.
And if you’re interested in some batting practice with an experienced, hands-on coach… click here to learn how Cycle 9 Alert fits into your grand investment plan.