Thursday, August 18, 2011

Stock Market Crossroads / ETF Trading

The market is undecided right now as to where it wants to go.  I think there could be another downturn in the near term.  I subscribe to a few sites and took in a free webinar this week and the prevailing sentiment is that we may test recent lows soon.  The two technical trading sites I belong to provide a daily market commentary with chart patterns and analysis and they're all pointing to technical weakness in the market based on current indicators.  In addition, they look back at recent levels of support, where buyers typically come into the market and buy stocks to keep them from falling too much and most support levels are quite a bit away from current levels.

What does that mean to me?  Yesterday I sold the two very small positions I had in my trading account when the market was up at the open and I'm currently in 100% cash looking for stocks/ETFs to pick to make $$ on if they go down.  As of right now, it's wait and see mode.  If you have a trading account, I wouldn't make any huge positive or negative bets at this point.  I'm not making any changes in my retirement accounts.

If we cannot get decidedly above 11,600 on the Dow Jones with decent volume, I may start to dip my feet into some of the inverse ETFs.  Inverse ETFs make you money if whatever they track goes down.  For example, if you think Gold is going to go down, you can buy the symbol DGZ.  If you think the Dow Jones is going to go down, you can buy DOG.  Some of the Inverse ETFs are considered 1x, some 2x and some 3x.  So if the ETF tracks the inverse of the Dow Jones for example, when the Dow Jones goes down 2% DOG (1x) goes UP roughly 2%, DXD (2x) would go up 4% and SDOW (3x) would go up 6%.  There are also 1x, 2x and 3x ETFs called Long/Ultra/Bullish ETFs on the positive side, so if whatever you're tracking goes up 2%, those go up 2%, 4% or 6%.  Pretty cool eh?  Generally speaking though, they're good for short term trades.  On any given day they track what they're supposed to, but over the long term, fees similar to most mutual funds can skew those returns. 

One of the guys on the SpikeTrade site I'm a member of is planning on betting that things will go down via TWM, which is an Inverse (2x) ETF for the Russell 2000.  The Russell 2000 is an index of small cap stocks.  Generally, when the overall market goes up, the small cap Russell 2000 stocks lead the way, the same is true on the downside.  So he will be buying TWM, in hopes that the overall market will go down and if the market goes down 3%, TWM will most likely go down at least 6% if not more.  He's a real smart guy that has been doing this a while and I consider him a bit of a mentor.  We usually interact pretty often via email with two other members with ideas, overall market comments, etc. has been a great site to join since it makes me step up my game when submitting my one pick per week, but even more so, it's gotten me in touch with other traders to bounce ideas off of and learn from, which so far has been a real great experience and just what I needed.  

If you're interested in learning more about ETFs, or have an opinion on where a sector might be headed and would like to know if there is an ETF you could use to trade your idea, let me know.  I really enjoy this stuff and also enjoy helping others where I can!  As always, don't take my posts as financial advice, I just do this for fun.  Thanks and happy trading!

P.S.  When I wrote this last night I wasn't expecting things to go down first thing this morning and continue to go down over 500 points at one point today, otherwise I would have placed my downside bets yesterday.  But am quite glad I'm at least in 100% cash and was able to sell BX for a decent gain yesterday, cause that gain would have been completely wiped out today!  Good to be lucky sometimes. 


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