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When stocks scream sell — here's how to survive a meltdown

Brian Sozzi
Editor-at-Large

With all the negative headlines on dual trade wars with China and Mexico being pounded into the brains of investors, perhaps it’s time to just short the hell out of the worse companies in the market this summer in the hopes of striking it rich.

You know, dust off your winning playbook from the Great Recession.

“It’s not dangerous,” Noah Hamman, CEO of AdvisorShares, said on Yahoo Finance’s The First Trade when asked about his current strategy for clients of shorting stocks of terrible companies. A short wager is a bet by an investor on a stock price going down in value.

“We will see what happens next, but people will sell off the low quality stocks first because they are going to de-risk,” Hamman added. “We think it’s time for investors to seriously begin to hedge their portfolio — not in big chunks — but maybe a percentage or two each time [the market rallies].”

If shorting individual stocks is a frightening proposition to you, Hamman recommends using two specific ETFs. One is the AdvisorShares Dorsey Wright Short ETF (DWSH), which shorts companies with bearish chart patterns. The other is AdvisorShares Ranger Equity Bear (HDGE), an ETF that shorts companies with poor fundamentals.

Suffice it to say, Hamman isn’t bullish on stocks at the moment. Indeed he has good reason.

Once leading areas of the bull market, such as Apple and the small caps, have dived in the past month on fears of profit hits from Trump’s trade war with China. Meanwhile, the yield on the 10-year note has cratered, causing a yield curve inversion that has recession predictors on Wall Street out in full force.

Morgan Stanley Chief Strategist Mike Wilson — who pretty much called the fall 2018 market meltdown — believes that recent economic data hints that U.S. earnings and economic risk is greater than most investors believe.

Others on Wall Street share the cautiousness of Wilson and Hamman.

“We are at risk of another 4% to 5% downside from here and that could be over the next few weeks. I imagine the G20 finance minister meeting on June 8 and 9 and then the June 20 G20 meeting will be pivot points,” BNY Mellon Investment Management Chief Strategist Alicia Levine told Yahoo Finance.

Given this backdrop, why even bother attempting to pick a short-term bottom in beat up stocks like Apple? Why not raise cash and put it to work via several short bets on really weak companies, to Hamman’s point?

The risk: an increasingly dovish Federal Reserve that sends the Dow ripping higher by more than 500 points, as was the case on Tuesday.

Hey, nobody ever said investing was easy.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi.

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