Overbought Market Conditions

On 1/31/2013, MarketConsensus News published an article on an imminent stock market correction. Looking at the below 1 year chart of the Dow, S&P and Nasdaq, we notice that in Jan-Feb 2013, all three major stock indexes have crossed their 1-Year “Horizontal Peak Line” level. This is the level after which they have experienced an average 10% stock market correction.

1-Year Peak Level - DJIA, S&P and Nasdaq - 1.30.2013_0
Chart Source: Yahoo! Finance

Ever since publishing our report, we have received numerous requests from MarketConsensus readers for an article on “simple” strategies that average individual investors can use to protect their investment holdings during a stock market correction. 

We decided to put this article together to answer some of these questions.

Simple Protection Investments (Hedging Against a Market Downturn)

Below are three simple strategies to protect your portfolio during a market correction – without having to use complex Options, Puts, Calls or other complicated products.

  1. Buy Defensive “Market Correction” ETFs
  2. Short Selling – Short stocks that have soared and are overbought
  3. Beaten Down Stocks  – Start buying stocks after markets have fallen 3%-6%
  1. Buy Defensive Exchange Traded Funds (ETFs)
    There are over a hundred Defensive “Market Correction” Leveraged ETFs (FAZ, ERY, BGZ, etc.) that provide some level of protection during a market downturn. These securities are structured to move inversely to the markets (Dow, S&P, etc.) or to specific market sectors (financial sector, technology sector, etc.).


    By their nature, they perform very well (go up in value) when markets are on a decline and do very poorly when stocks are rising.