Is the bear coming back for another grizzly round with the bull?

If you have an offshore portfolio invested in stocks and bonds then it might be the right time to boost your reverse-index exposure this week as stocks break important support levels on fears of a runaway pandemic (Swine flu) and, more importantly, overly optimistic corporate earnings estimates.

Since last week, both major and emerging market equities have started to stumble following a big six week rally that saw indices rally about 30% off their March 9 lows. And like the previous three rallies that occurred since September 2007, this one should be viewed in the context of an ongoing bear market. Each rally since late 2007 has been followed by a series of new market lows with the last trough on March 8 taking the Dow and the S&P 500 Index down 56% from their all-time highs.



Unlike the United States, which offers a few dozen reverse-index exchange traded funds (ETFs) covering everything from country to sector short bets, Europe is relatively new to this discipline. But a few reverse-index ETFs are trading since 2007 in Frankfurt, Germany – the biggest hub for reverse indexing.

Indeed, Deutsche Boerse (deutsche-boerse.com) has emerged a leader in reverse-indexing providing investors with high trading volume and narrow bid-to-ask spreads for these important products that serve to hedge stock market portfolios.

Deutsche Bank (DB) offers a wide range of highly liquid long and short ETFs denominated mostly in euro and, to a lesser extent, dollars. Called X-Trackers, DB has been successful marketing these innovative products accompanied by strong trading volume.

The three largest reverse-index funds based on assets and trading volume activity are the DB X-Trackers DAX Short Index (in EUR and USDs); the DB X-Trackers Short S&P 500 Index and the DB X-Trackers Short EURO Stoxx Index. Over the last 12 months these reverse indexes have gained between 35% and 55% in euros as global markets have crashed.

If you have an offshore stock portfolio then now is the time to hedge your equity exposure. Markets are breaking down again and, like previous bear market rallies, this one should be sold. If you’re bold enough, consider hedging your portfolio with reverse indexing products like the Deutsche Bank X-Trackers in Frankfurt.

This bear is credit-inflicted – the worst possible bear imaginable, unlike previous bear markets in the post-WW II period. Understanding this phenomenon will protect your assets from more hardship this summer as we re-test the March 9 lows.