Dear ETF Subscriber:

Stock prices have fallen sharply over the past four trading days and appear to be in danger of breaking down through some key long-term support levels of around 12,000 on the Dow Jones Industrial Average and 1,325 on the S&P 500.

Although I feel that our portfolios are well-positioned for the type of investment environment that I see developing over the next six months, the time has come to buy some insurance against a potentially big drop in stock prices. I therefore advise you to place a buy-stop order on the ProShares UltraShort S&P 500 (SDS) ETF at $63.75.

The ProShares Ultra Short S&P 500 (SDS) fund is an inverse-index ETF, which means that it will appreciate in price when stocks decline. To be more specific, SDS seeks investment results that correspond to twice the inverse of the performance of the S&P 500.

For those of you that aren’t familiar with buy-stop orders, please note the following:

A buy-stop order gets executed when the price of the security on which the order is placed rises to the buy-stop price. Therefore, if SDS rises to $63.75, your order will be automatically executed near the next available trading price. If, however, SDS never trades at or above $63.75, your order won’t be executed and you won’t purchase SDS.

Some of you have likely become nervous about the recent rise in oil prices and the accompanying decline in stocks. However, as I mentioned in last Friday’s Weekly Update, my models indicate that the worst is over for the U.S. economy, that oil prices will soon fall sharply, and that stocks will trend higher during the second half of this year. Yet, I always abide by an investing principle that I learned many years ago — never fight with a herd of bulls or bears and always be willing to admit that your analysis might be wrong. That’s why I’m recommending buying some insurance against a potentially big decline in stock prices.

The negative news coverage in the major financial media is causing many stock market participants to panic by selling even the stocks of financially strong companies that have consistently been growing their sales and earnings. Although I expect astute investors and bargain hunters to begin gobbling up those beaten-down stocks within the next couple of weeks, my experience indicates that stocks could fall sharply in the meantime.

An analogy for my SDS recommendation is presented below.

Think of what you would do if a large herd of cattle were charging directly towards you, but a cliff with a vertical drop of 1,000 feet was right behind you. If you ran towards the cattle you’d likely be stamped to death. However, if you turned around and went in the same direction as the stampeding herd, you’d fall off the cliff and still die. So, what could you do to survive?

My suggestion would be to scurry around for some type of vine near the cliff’s edge that you could hold onto, or for a nearby tree that you could climb, until the crazed stampede of cattle ran by you and fell to the valley below. You could then wipe off your sweat and prepare for a better day.

In other words, fighting a large group of panicking investors who are all running for the gates at the same time is a foolish endeavor. Yet, selling a portfolio of stocks that your research indicates will perform well in the not-too distant future is also a bad idea. Therefore, a wiser action would be to hold onto your stocks but to buy some insurance against a potential near-term decline in those stocks. An investment in the ProShares Ultra Short S&P 500 will serve to accomplish that objective.

As always, please don’t hesitate to email us at ETFStrategist@newsmax.com if you have any questions concerning The ETF Strategist.

Sincerely,

David N. Frazier

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