Just when some investors tried to forget that this happened, Monday's trading brought volatility to the market. This is a wake-up call for them. With the Dow Jones Industrial Average (DJI) dropping more than 1,300 points from Friday to Monday afternoon opening trading, the concerns of some more sensitive investors are understandable.

Although most analysts describe it as a natural short-term correction, the truth is that no one really knows where the market will go next. It turns out that there was a sharp rebound on Tuesday because investors seemed too eager to snap up any offers. This pattern-a big rise after a big drop-sometimes indicates that the market will continue to fluctuate. Since continued market volatility is more closely related to downtrend prices, investors will feel nervous when seeing it.

Curious investors will naturally want to know what they will do if the stock starts to decline more consistently. Many investors don't know that the exchange-traded funds (ETF) they can buy will allow them to profit when the stock index price drops. These reverse funds are linked to specific indexes.

For example, most investors are aware of State Street’s S&P 500 Index ETF (SPY) or Vanguard’s S&P 500 Index ETF (VOO), both of which track the Standard & Poor's 500 Index (SPX) with a near perfect correlation. For the Russell 2000 small-cap index, iShares has issued an index tracking ETF (IWM), which is positively correlated with the ETF (IWM). ProShares issues ETFs that are negatively correlated with these indexes. This means that when the value of the corresponding index tracked by ProShares drops by 1%, the value of ProShares' short S&P 500 ETF (SH) and its short Russell 2000 ETF (RWM) will increase by 1%. (See the table below.)

A comparison like the one shown above creates a mirrored price pattern on the chart because these instruments are completely opposite to each other. But the world of ETF issuers has not stopped because of these two. They managed to create tools that were not only negatively correlated but also available.

Using inverse and leveraged ETFs, investors may find that when stocks fall, their positions will grow exponentially. This means that if the relevant benchmark index falls by 1% daily, the double-leveraged (aka 2X) ETF may rise by 2%, and the triple-leveraged (3X) ETF may rise by 3%.

Direxion's Daily S&P 500 Bear 3X ETF (SPXS) and Daily Small-Cap Bear 3X ETF (TZA) both provide triple inverse leverage. For anyone lucky enough to hold these stocks between Friday, June 16 and the close of Monday, June 19, the results are pretty good, but only if they manage to close their positions before Tuesday. The timing of these instruments can be tricky because they are a double-edged sword. The reversal of the benchmark index on Tuesday meant that leveraged funds fell sharply, as shown in the chart below.

For those who can make short-term transactions and know when to make quick gains (or losses in time), these tools provide an excellent opportunity to take advantage of the volatility of the benchmark index.

Investors can also use similar tools with a narrower focus, such as industry indexes. State Street has issued 11 well-known industry-specific ETFs. Each of these funds invests in a collection of a dozen or more companies identified in a particular economic field. Each fund is easily identified by the three-letter stock code beginning with XL. At present, the comparative performance of these industry funds shows that those industries that are sensitive to inflationary pressures are experiencing the greatest downward trend. The chart below depicts their views on the end of trading on Monday.

Looking at this chart, it is not difficult to imagine that people who want to take advantage of the downward trend might look for industry-specific tools to help them do so. Considering that industry funds in finance, basic materials and energy have been falling in the past two months, traders may encounter Direxion’s 3X financial industry reverse ETF (FAZ), ProShares’ short basic materials (SBM) or ProShares 2X UltraShort Oil & Gas ETF (DUG), as shown in the figure below.

These funds need to be used with caution. Their short-term transactions are usually better than long-term investments. However, as the market becomes more volatile, they may prove to be advantageous strategies for timely traders.

Futures/commodity trading strategy and education