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What do you do in a downtrend market?

markets down

US stock market turbulence has spilled into the Asia markets throughout January. The Federal Reserve has confirmed its hawkish stance on a more aggressive tightening of its monetary policy.

The ASX 200 has fallen into correction territory, plunging by as much as 11% from its record high in August 2021. It is certainly a very hard time for investors holding losing positions. Panic selling can often lead to unnecessary losses once the markets bounce back. There are some tools you could use to hedge your current positions.

CFD short sell

You can certainly place a short position for any instruments that you are long, which is also an advantage when you have a CFD trading account. When the price falls, a short position will bring gains for the same amount as the falling prices. You can make your own decision for how much percentage of your holding needs to be hedged. But keep in mind that you need to close these hedge positions when prices potentially head to the near-term bottom. You can also refer to the market options price to decide on the closing prices.

Defensive instruments you can consider

If risk asset accounts for a large percentage of your portfolio, you could consider increasing the safe-haven assets to hedge the risks. The typical safe-haven assets are gold and US dollars. In the stock markets, defensive sectors usually are in utilities and consumer staples. Products you could consider are XLU (Utilities Select Sector SPDR Fund) and XLP (Consumer Staples Select Sector SPDR Fund).

We can see in the below charts that the sectors in the middle range are the ones more stable and still on track of uptrends.

The VIX is also a good tool for investors to hedge markets in turbulent times, as it is the index to gauge market sentiment. VIX surges when investors show concerns and worry, especially in a market crash. We can see VIX skyrocketed to above 80 in March 2020, when a pandemic-induced sell-off happened. Now the VIX is at its one-year high above 30. If the downtrend keeps its momentum, the VIX will go up further. 

Instruments to hedge long positions

There are some instruments providing the reverse trend against the mainstream stock markets too. These products are going adversely against some products, such as PSQ or SQQQ to hedge QQQ, SH to hedge S&P 500, SARK to hedge ARK, and BetaShares BBOZ to hedge ASX. However, you need to be cautious when using these hedging tools as some of the reverse ETFs provide leverage in the pricing movement. 

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