Exchange traded fund (ETF) investors beware: there is more volatility looming on the downside as the carry trade and proprietary traders continue to unwind profitable trades.

Any current strength the market is experiencing is because of short covering and this is likely to become evident over the next two to four weeks, reports Pierre Daillie on Seeking Alpha. What is happening is institutions are still unwinding their profitable trades to make money, the market goes down, and short covering occurs with a bounce in the stock prices, that appears as a recovery.

The catch is that as long as the cash call remains higher than the outstanding short positions, the market will continue to trend lower. ProShares has a new breed of ETFs that help wary investors catch the downside and bet against the market. The short funds do not use leverage, but the ultra short funds do.

The TSX in Canada has the Horizons Beta-Pro which launched "double-short" ETFs and trade inversely with the market.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.