Montreal, Canada

With global stock markets increasingly in a downtrend and possibly poised to decline even further, I’ve begun to initiate pair-trades in my Commodity Trend Alert VIP service. Stocks might tank from current levels but several stocks are worth buying even amid high volatility because prices have come crashing down.

On Tuesday, I’ll initiate a long trade in distressed alternative energy and short one of the largest coal producers; if I’m right on both accounts, I should earn a profit. If I’m only half right, I’ll protect my downside and possibly make a few bucks.

I’m drawn to smashed-out wind producers at these low price levels after a spate of bad news clobbered the industry again recently. Alternative energy stocks are more than 50% below their highs three years ago and, in some cases, down more than 70%. Meanwhile, coal is coming under pressure from a plunging natural gas price making that fossil fuel cheaper to generate for companies and a slowing world economy, implying less coal consumption.

Buying and holding stocks since 2000 has been a dangerous proposition. The “buy and hold” mantra certainly worked wonders from 1982 to 2000 but undoubtedly backfired over the last ten years as equities suffered their worst decade since the 1930s. Hedging is paramount to portfolio success in an age of violent capital markets, an ongoing credit dislocation and potentially harmful government policy initiatives. This means if you buy a stock it makes smart sense to hedge that position with a put option or a reverse index ETF.

When markets are highly volatile investors should consider a strategy to reduce risk called “pair trading.”

In its simplest form, a pair-trade involves buying a stock or going long a company you believe offers high value while betting against or shorting an overvalued stock in the same sector to mitigate market risk. It’s sort of like running your own little hedge fund but with greater liquidity and cost-efficiency.

On Tuesday, I’ll initiate my first pair-trade. I’m targeting the energy sector first and then plan on building other trades in the base metals, agriculture and gold mining.