I realize that most traders are looking for opportunities to buy stock not to short stock but in a bear market buying puts or shorting stocks can be a great way to leverage negative market fundamentals. One of these opportunities right now involves looking at the supporting industries in the real estate market. Traders, analysts and reporters seem to be paying attention to mortgage companies and companies holding mortgage backed securities but there is a whole series of industries that suround the lending industry and are affected by the success or failure of US mortgages.

Here is an example of exactly what I mean. There is an iShares ETF that tracks the yield on prime mortgage securities. It goes by the symbol MBB and can be invested in or shorted like any other stock. Mortgages are as far as many traders and analysts are digging into the whole real estate finance problem/opportunity. However, there are other industries with stocks that will "follow" the performance of these securities. Very often a break in the performance of mortgages (represented by MBB) will lead a similar break in surrounding or affiliated stocks. The second chart below is an example of one of these stocks on the periphery of the mortgage crisis. Land America Financial Group, Inc (LFG) is a leading title insurance and escrow services firm. As you can see the two charts are very similar; as mortgage performance goes so goes Land America. Therein lies the opportunity.

With the recent news from the industry of record defaults in the prime mortage category and a quintupling of jumbo prime mortgage defaults in May 2008 there appears to be room to fall in both MBB and LFG. If the pattern holds steady, a decline in LFG could be preceded by another break in MBB which would work as a good timing signal for a trade. From a fundamental perspective, it make sense to explore short opportunities outside those stocks that traders are concentrating on but which are likely to follow the industry in general.

In a bear market all you need are a few crappy stocks. How do you feel about shorting stocks versus buying them long? Although the risk in both trades is similar, traders typically avoid shorts in favor of long positions but that can work against them when the market struggles. How about you, do you short stocks? If so what are you shorting now? If not, why not? Join us in the forums.

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iShares MBS fund (MBB)

LandAmerica Financial Group, Inc (LFG)

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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved."