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Don't Get Caught in a Bear Trap

Stocks in this article: SDS SPY

NEW YORK ( FMD Capital Management) -- After a big year, the market has been decidedly weak so far in December. Despite an upbeat jobs report, we are seeing a consolidation in prices across most of the major indices. This consolidation could be healthy, given the height of the market and the incredible run that it has undergone since we began the year. However, it is also going to give some hope to the bears that we will see at least a short-lived selloff before we close the books on 2013.

The percentage of bears is near historical lows. When you add in the potential for tax-loss selling and profit taking before year end, it starts to become easier to convince yourself that the market may already have peaked.

I know more than a few investors who are licking their lips for the chance to indulge in the guilty pleasure of shorting the market from the highs. Those that have missed the rally will be itching for an opportunity to make up that money on the downside. With the advent of inverse ETFs, like the ProShares Ultra Short S&P 500 ETF (SDS), this endeavor has never been more accessible to the average trader.

Personally, I am not a huge fan of trying to call a top in the market or looking to employ leverage to enhance returns by betting against the crowd. Experience has taught me that most retail investors find themselves entering inverse positions at the wrong time and for the wrong reasons.

I have met only a handful of steely traders in my career who have the time, tools and discipline to consistently profit by shorting stocks. These traders have the uncanny ability to set aside emotion and look at an opportunity from a completely objective perspective. In addition, they are quick to cut their losses if the tide turns against them.

More often than not, I talk to investors and clients that end up getting caught in a bear trap that lops off a portion of their hard-earned nest egg. For those who aren't familiar with the terminology, Investopedia defines a bear trap as:

"A false signal that the rising trend of a stock or index has reversed when it has not. A bear trap prompts traders to place shorts on the stock or index, since they expect the underlying to decline in value. Instead of declining further, the investment stays flat, or slightly recovers."

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