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ETF Game
Posted On Friday, April 17, 2009 at at 5:36 PM by Chad Carlson
When it comes to making money in a recession, understand two things; it can be done and flexibility.
For the past two decades, especially the 90’s and the tech boom, it was common to see a stock double or even triple within a short period. There was no major statistical analysis, throw the darts and roll the dice. Things have changed, the pendulum has swung. Our market is not producing the same results, yet we still want our portfolios to increase 10-12% a year. Obviously in a recession that is not going to happen, but our portfolios do not have to be down 40% either.
A close confidant of mine with Morgan Stanley has focused on taking advantage of the swings in the market by utilizing leveraged ETFs. The ideology is simple, but the need for flexibility is great. Two ETFs to keep in mind are Direxion 3x FAS and BGU. Both are bullish Financials and Large Cap respectively. But you need to understand exactly how ETFs work. ETFs can be traded just as easily as any other stock. All you need is a brokerage account. Zecco.com has some of the best rates around.They have the diversification of a mutual fund but trade like a stock. The attraction recently to ETFs is their ability to take advantage of volatility, much like an option, but without the hassle of understanding calls and puts. But remember an ETFs whole goal is simply to outperform their respective sector each day, not over a long term basis. When an ETF claims to “double the DOW”, their time horizon is today, not tomorrow. Do not believe if over a five year period the DOW gained 10% that your return should be 20%, it does not work that way.
If you take 10-15% of your portfolio and buy an ETF, place a stop order 20% below your purchase price. This allows you some volatility without losing the entire value. For example, you bought FAS and out the gate the Financials are getting hammered, the ETF will drop, but maybe only 16-17%. During the afternoon, the Financials rebound and all of a sudden the ETF is up 9%. You made good money, with down side protection. But let’s say the Financials continue to get hammered, the ETF drops 25%, your stop order triggers and you lose 20%. It stings, but 20% of 10% of your total portfolio isn’t too bad. Allow yourself some volatility, do not put a stop order for 1% below your purchase price, let it play out.
This may not be your flavor, but it’s one idea that has worked. This is not a long term play; this is a day trade maneuver. There are a number of ETFs that hit on just about every sector of the market; find one and follow the sector for a few weeks. When the market is so inconsistent, taking a protected risk can have huge payouts. This is what “smart money” is doing, think about it.
-Chad Carlson
Almost Back To Ground Zero - Shorts Here We Come
Posted On Wednesday, October 29, 2008 at at 11:59 PM by ChrisWell, as we expected, The Fed went through with their cut of 50 basis points. We saw the market rally in anticipation of the cut as well as stay fairly strong after, until the last 10 minutes where we saw a lot of profits being taken. I sold out of most of my call options, because DIG, RIMM, and UYG were all up strong and yielded strong gains. I gained a 90% return on my Nov. expiring RIMM option, 70% on my DIG option, 60% on my UYG option, and I kept my .QAADB, April expiring call option which I bought for $9 (It closed today at $15), because I believe Apple will continue to go up. They are cash liquid, have no debt, and continue to rise above with their innovation.
Now what goes on tomorrow? Usually, I would expect a pretty strong sell off, considering we had two pretty strong days of green. In this market, that's more we can ask for. However, Japan looks to make their own Fed Cut, which if they make a strong one, would most likely send our market skying tomorrow, especially Asia stocks. In fact, as we speak, Hong Kong's SSE is up quite a bit off of anticipation.
So for me, Tomorrow is a measuring day. Another day in the green, expect our short positions to be in prime position to buy back into. Personally, I feel it will be a green day, so I will be looking to get back into FXP or SKF if it gets in the low $90's or below. Also, I will maybe to look to get out of my Apple (AAPL) option if we see it go up another 50%. If for some chance, the sell off is stronger and pushes the market down, tomorrow will end up being an "observance day" for me. Remember though, to not give up on the market. You cannot count on how the market is going to finish until watching it five minutes before it's going to close. We saw a 300 point swing today in 7 minutes. The market is very volatile and a Red Morning can be a huge Green Afternoon, so keep tabs.
So keep your eye out and if we see another strong green day, look to building up your short FXP position, because as we saw from last week, that's a great wave to ride in this market. If it's red, don't worry about it, because election week is next week and I think we'll see some more green next week. Happy trading and we'll see you tomorrow.
