Looking at the Action, It’s Time for Some Insurance

precious metals stocksIf you’re looking for some downside protection in this market, one of the most popular instruments is an exchange-traded fund (ETF) called the ProShares Short S&P 500 (NYSEArca/SH). Basically, this security tries to mimic the S&P 500 Index 100% in the opposite direction. So, if the stock market goes down, SH goes up by about the same amount. It’s the kind of security that represents some downside protection in equities.

The broader market isn’t looking too good here and you know you’re in a bear market when investors ignore good corporate news. If a stock like Intel Corporation (NASDAQ/INTC) isn’t going up coming out of a recession, then you know you’re in trouble.

We’ll have to see if the current pullback lasts, but it’s likely that the market will test 10,000 on the DJIA and 1,000 on the S&P 500. Investor sentiment seems to be critically volatile.

There isn’t a lot of action to take in a market like this. Speculating in equities is much more difficult in this kind of environment where there really is no trend. Things are up one day and down the next. Perhaps the best strategy for traders is to just play the index futures.

I still view precious metals, particularly gold and silver, as being one of the most attractive sectors in the market for investors to consider. A lot of gold stocks have already gone up in value, but the fundamentals support the current valuations. A lot of mining companies have solid expectations for production growth over the next few years. With the current global fundamentals, I just don’t see gold dropping below $1,000 an ounce. At this price point, mining the commodity is solidly profitable.

We had some strong price performances in select large-caps, like DuPont (NYSE/DD) and Caterpillar (NYSE/CAT), over the last couple of months. Companies like these are viewed as barometers on the global economy. But, the market seems destined for some near-term retrenchment. It’s partly the time of year, but also a reflection of the expectations for the future. We just aren’t seeing the kind of growth necessary for investors to want to buy stocks.

I think some downside protection in this market is a good business strategy. The broader market is highly vulnerable for the rest of this year.