QID: Recession Resistance Pick up 50% since our Nov. 07 recommendation

UltraShort QQQ ProShares (ETF)  (Public, AMEX:QID) has ran up 50% since last November.  Some of you fellow Masters may recall we recommended it in our Recession Resistance Index, that index is free with our Master Picks subscription.  Yea, yea, yea, quit trying to sell me something.  You're right, so let's talk a bit about betting against the NASDAQ and why it's still a good choice.

Here is when we told you to buy, back in November and for playing the market short, it's been a great choice and far less risky than buying Puts:

Jesse Emspak from Investors.com had this to say about the QID last week:

One of the most popular ETFs that short is ProShares UltraShort QQQ (AMEX:QID) with $1 billion in assets.

The ETF tracks the Nasdaq 100 and returns twice its inverse performance.

So, when the index drops by 1% in a day, the ETF rises 2%.

Year to date, the ETF has returned 32.25%. But that is against a one-year return of -5.59%.

Among the strongest performers in 2008 is ProShares UIS Semiconductor (AMEX).

It brought investors 27.79% through Tuesday and had a positive return for the trailing year, of 10.00%.

Pros And Cons

There are two things investors need to know when shorting.

First, markets tend to go up over the long run. So ETFs that short shouldn't be considered long-term investments.

Second, there is a strict limit on the gain that any short can make. The value of any index can't go below zero.

But short ETFs have other uses in a portfolio.

For example, they can make a portfolio market-neutral, so that any further movement doesn't affect returns.

An investor puts a percentage of his assets in an inverse ETF. That way, any further market movement downward won't affect the portfolio's value as much.

The percentage depends on how nervous one is about future market direction.

This is a good plan for those who want to get out of the market in bad times but don't want to take the profits and recognize a capital gain, which could mean a tax hit.

Neutral Strategy

"It's a way to neutralize the portfolio when you don't want to sell off your position," said Kenneth Landgraf of Kenjol Capital Management in Texas.

Gary Gordon, president of Pacific Park Financial, agrees that the best use for betting against the market is to reduce exposure.

He adds that while frequent traders can sometimes make money shorting, it isn't often a good strategy for most investors.

Shorting stocks is almost always a hindsighted activity, Gordon says. "By the time you get the idea to do that, the party's probably over," he said.

When peaks or troughs become noticeable to the general public, that's usually when they start to reverse, according to Gordon.

"If you are feeling pretty comfortable and thinking, 'What could go wrong?' -- maybe that's the time to short," he said.

Investors have gotten interested in shorting, says Gordon, because of its association with hedge funds. That doesn't mean it's a winning strategy -- just popular.

Like any stock, fund, or ETF, it's all about timing Masters.  With all the negative nancy Wall Street commentary and headlines that remind us daily about a looming Recession.  The QID makes perfect sense. 

The Masters are still convinced we will have one more big crash in the market, then things should start to shape up.  Even if we are wrong, there's nothing wrong with having a nice short play in your portfolio to help you balance your investments.

You make the call.