Investors in the market often believe that if they buy and hold stocks, they will do well by earning 11.5% long-term on their money. While the 11.5% gain may materialize, after taxes and real inflation is figured in, the gain is nothing more than staying even in real dollars. When markets have had a bullish rally, what follows next is typically a decline of 1/3 to 1/2 of the rally. What's so damaging about this is not only the money lost, but the time lost. The investor would have done better to sell overvalued positions, wait in cash, and allow the market to settle. Some of the most simple and well-known technical indicators like stochastics and MACD can help even the novice investor see that the market is at or near a top or bottom.

By shorting the market, one can actually sell stocks they don't own at the top of the market with the hopes of "buying" back the stock later at a LOWER price to cover the short position. This may sound more complicated than it actually is in practice. Just as one wishes to buy a stock at a low price and sell it later at a high price, the opposite is true when shorting stocks. A margin account is required (contact your broker to ask how to set up your account in this fashion). When you spot a stock that is "overvalued" and the market is peaking, SELL SHORT. Don't waste time! When the stock drops in price you will then buy it back later at a lower price and make the difference. Simple enough?

Of course the question is - how does one determine what stock is overvalued? Generally stocks that have high P/E ratios, like 50 and above, reflect earnings too weak to support their lofty prices. Stocks in troubled industries may also be prime candidates to fall once the markets have peaked. Another interesting way to make money in down markets is through short, and Ultrashort, ETFs (exchange traded funds). These are a lot like mutual funds, except they can be traded during the day. These are bought as long positions (typically) but internally they are shorting the market, or a specific index, or a sector. For example, the ticker SKF is an "ultrashort" ETF. This means it attempts to DOUBLE the INVERSE performance of the financial sector. If you think the financial sector is in trouble, you may want to add SKF to your portfolio. As the financial index DROPS, this ETF will rise - and rise about double the amount of the drop! SRS, for example, is a double inverse of a real estate index.

The important thing here is that investors should always be pushing to make their money work for them. Lazy money will never perform as well as money that is being actively managed by someone who cares enough to see that money grow.