Inverse Trading – One Simple Trick to Out Perform the Stock Market

On March 3, after the Federal Reserve reacted drastically to cut interest rates amid the looming coronavirus pandemic, I knew we had to add some bearish trades to the portfolio.

Most investors think it’s too risky to try to bet on pullbacks in the stock market. They can only see stocks going higher.

That’s the case for the majority of the time — stocks are designed to go up. And trying to profit from pullbacks can backfire if you get the timing wrong.

But after back testing dozens of profitable strategies, I have found that if we can profit from pullbacks, we can always get better results.

So how can we do it safely?

I’ve spent years perfecting and developing several system-based trading strategies.

I enjoy it.

I love doing the research and analysis to run a proper test on a strategy that can create incredible profits.

Some find it boring or tedious. But when we get to the end result, which has been my profitable trading strategies, it’s all worth it.

Now, I’ve learned quite a bit about going through these processes over the years.

What I’m sharing with you today is as simple as buying a stock. And it has the potential to help you double the stock market’s performance each year.

Let me explain…

How Can You Win While the Market Loses?

I’m talking about inverse funds.

These are investment funds you can buy using a ticker symbol, just like a stock, and trade directly through your brokerage account. And unlike shorting a stock or buying a put option, there’s nothing extra you need to do.

An inverse fund is set up to track the inverse relationship between a specific sector. So, when the sector declines in value, the inverse fund rises. And when the sector rises in value, the inverse fund falls.

What it does is allow you, as you approach a point where you may expect stocks to decline, to add an inverse fund instead of rushing to exit your bullish positions.

Over time, the stock market is always heading higher. It averages better than 10% a year, over the last 100 years. There are rallies you don’t want to miss.

You can see how an inverse fund allows you to stay invested — safely — by adding gains as stocks pull back.

Inverse funds are simple to understand, but the important thing to keep in mind is that they are not designed to be held for an extended period of time. Just a few weeks at most is the typical holding period. Beyond that, benefiting from a pullback becomes harder.

There’s two reasons to use inverse funds: to hedge your overall portfolio or to be aggressive on expected pullbacks.

But as I said, it’s not a trade you want to set and forget.

Be strategic.

Buying an inverse fund only to benefit while we are in a pullback (i.e., hoping on the downtrend) or trying to time a quick turnaround is best if you only hold the inverse trade for a few days.

The trick is finding a successful approach. We need something to guide us through the timing of these trades.

And this is where system trading comes in.

With my Profit Stacking strategy, we are able to pinpoint weak seasonal periods and capitalize on any pullbacks through inverse funds. That keeps us safe from the inverse fund risks and lets us maximize our profits on these pullbacks.

Let’s run through one of our best trades that we recently experienced.

Let’s run through one of our best trades that we recently experienced.

Putting Our Strategy to Work

I had already planned on recommending inverse trades on my radar in April to take advantage of seasonal trends. But with the news coming out of the stock market, waiting till April would have missed it this year.

So I recommended readers of my research service Automatic Profits Alert buy an inverse fund on the energy sector on March 3, Direxion Daily Energy Bear 2X ETF (NYSE: ERY).

The 2X, means two times. It’s a leveraged exchange-traded fund (ETF) that is designed to return two times the inverse relationship of the energy sector. If the energy sector rises 2%, this fund declines 4%. And if the energy sector falls 2%, this fund rises 4%. (When we recommended the trade it was actually a 3X fund, but it has since changed.)

By jumping in on March 3 and exiting March 9, just six days later, readers who bought in saw this inverse fund explode higher, handing them a gain as high as 94%.

We followed the rules of trading inverse funds by only holding it for a few days and then got out. That gave my readers the best results. If we’d held longer, we risked losing our gains because of the way inverse funds are structured. We won’t get too far in the weeds here, but know that inverse funds are a poor way to store your money long term.

But our short-term trade paid off big time.

Needless to say, it was a much-needed cushion during this volatile period.

We were still managing some bullish trades as the stock market plunged lower.

But being able to add a gain that reached as high as 94% in a matter of six days, is the kind of data that helps any system-based strategy easily outperform the overall stock market.

As stocks were plunging, our strategy was delivering gains to help balance it out.

We have an early transcript of this approach available online to explain how profit stacking helps us outperform the stock market each year. You can click here to read through the conversation.


Chad Shoop, CMT

Editor, Automatic Profits Alert

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