ETF Swing Trading – Good or Bad? Depends Which Side of the Market You’re On!

The ETF Sector Rotation Strategy (our strategy for longer term investors) lost ground today, but the positions are still in positive territory.

The Swing Trading Playbook has been hitting it out of the park all week. We had very few trading signals since the positions entered earlier in the week are working great. The Playbook is up about 4.5% for the week and holding a few unrealized gains over the weekend and into next week.

It looks like Monday may be the time to hedge the portfolio or start ringing the register on few positions.

Here is a screen shot of the open positions for the Swing Trade Playbook. As you can see, huge positions are not necessary to make money swing trading. The key this week was keeping the losses small and letting the winners run.

To learn more about how you can benefit from us visit http://etfupdater.com/.

Have a good weekend!

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://etfupdater.com/

Why the Media Has Short Squeezes Wrong.

Lately, the media has been talking up a storm about stocks with a high short interest proposing hedge funds are in trouble and need to cover. I find this a bit far from reality since most funds use capital and derivatives more efficiently than the average person thinks.

They, the media, or the so called professional being interviewed, seem to think any stock with a relatively high short interest and a trading day with a high positive net change is a short squeeze. Sometimes this is the case, but not always. Especially for stocks that are optionable.

You see, if a market participant is short an optionable stock and the stock starts to rally, to hedge themselves or, get delta neutral the participant can purchase an option instead of covering the stock in the open market. In doing so, the market participant does not add fuel to the current rally of their short position. Therefore, they can still hold the stock short and not lose any capital.

The theory of the media’s short covering rallies can be valid if the security in question is not optionable. In this situation, the hedge fund does not have derivatives to mitigate risk and to stop the trade from depreciating in value the fund will need to cover the stock in the open market – adding fuel to the rally in question.

Unfortunately, the stocks they were talking about were optionable so I would be suspect about calling that particular rally a short squeeze.

If I were to play the short interest / short squeeze trading game for either a daytrade or swing trade before I can make an investment decision I would need to the following data points increase the probability of a making a wise decision.

1st Gather the data for stocks with the highest short interest and days to cover ratios
2nd Filter out the stocks that are not optionable (this increases transparency)
3rd Look at the largest holders of the each stock and determine
Are solid mutual funds with deep pockets and good returns on the year?
Are the large holders of the stocks in question individuals or other hedge funds?

Take care and happy trading.

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://ETFUpdater.com

Leveraged ETFs – The Leverage Mix-UP

I’ve come across many market participants believing if they purchase a leveraged ETF and held it for an extended period of time, the ETF’s performance should double the index or sector it’s benchmarked against.

Please understand this is not the case. The majority seek to provide a 200% DAILY return on the underlying index they track.

Notice I typed “DAILY”!

Noted in the ETF providers prospectus, which I’m sure we all read quite diligently. It is stated the leveraged ETF is designed to double the Daily return, not the total return for time periods greater that one day.

I noticed this while I was helping a hedge fund that trades ETFs quite heavily. The were using the leveraged ETFs to hedge the portfolio and noticed the hedge was not delta neutral. The hedge was actually appreciating more than what the underlying portfolio was depreciating.

So, why does this happen? Why doesn’t it track properly if market participants hold positions overnight? Compounding! Just as we all like compound interest you get the same effect here, except since the ETF can depreciate in price it can work adversely too.

Over time the effect of compounding and leverage can have a significant effect on the total return of the ETF.

Here is an example assuming a $10,000 investment.

Day 1:

The underlying index increases 1%
The leveraged ETF increases 2%

The first day = 200% return, just as we thought, and we outpaced the market, great!

Day 2:

The underlying index decreases 1%
The leveraged ETF decreases 2%

Underlying Index Value: $9,999 (An increase of $100 and then a decrease of $101 on day two)

Leveraged ETF Value: $9,996 (an increase of $200 and then a decrease of $204)

As you can see the index decreased in value $1 over two days and the leveraged ETF decreased $4 over the two days (this is four times the cumulative index loss as opposed to two times the loss).

Hopefully, I’ve explained this in detail enough for you to see how over a longer period of time the cumulative percentage change of the leveraged ETF has the ability to vary significantly from the underlying index.

Here are a few popular Leveraged ETFs:

QLD
DDM
SSO
MVV
SAA
UWM

If you would like to learn more about leveraged ETFs visit my home page http://etfupdater.com or http://proshares.com.

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://etfupdater.com

Financial ETFs – Today’s Hot Sector

The Fed’s “jawboning” seems to have helped the market over the past few days, but only time will tell if it is enough to keep the economy from going into recession.

Today, as of this writing the Dow is up about 380 points or approximately 2.93% and the S&P 500 is up about 2.9%. This is the largest one day percentage gain all year. I don’t believe we are out of the woods quite yet so I wouldn’t load up on speculative sectors or margin just yet.

The financial ETFs (Exchange Traded Funds) XLK, IYG, IAT & IAI are the strongest up 5% plus and today’s price action is indicating one of two outcomes. Either Wall Street thinks the anticipated fed rate cut will be the subprime solution or most investors are having short term memory loss concerning the environment of our financial sector. I’m not sure what they are thinking, but I seriously doubt in two days the financial issues are resolved.

Again, only time will tell.

Our portfolio is only 50% invested on the long side and our model still signals defensive ETFs are the place to be. If you would like to learn more about our defensive stance, an ETF update, our swing trading picks or our model portfolios visit http://etfupdater.com.

Our most recent addition to the portfolio was XLU. This energy ETF provides exposure to companies involved with water and electrical power along with natural gas distribution industries.

Mike Matousek, CMT
Portfolio Manager, ETF Updater

http://etfupdater.com

How ETF Sector Rotation Strategies Can Outperform the Market

It seems with latest buzz about ETFs and the ease of trading individual sectors within an index, sector rotation strategies are becoming increasingly popular. So the question I’m frequently asked is “how can your sector rotation strategy increase the odds of outperforming the market?”

The answer is quite simple. A positive outlook for the economy surely helps the broad market, but many times during the economic cycle some sectors will outperform the market and respond more favorably than others due to various external factors. The intent of a sector rotation strategy is to increase exposure to the sectors anticipated to outperform and reduce exposure to the sectors anticipated to remain flat or under perform. In doing so, the portfolio manager can capitalize on market fluctuations with the opportunity to benefit from sector expansions and sidestep sector declines.

Keep in mind there are many ways to formulate a sector rotation strategy. Here are the most popular:

Technical Analysis, the analysis of price action, trend lines or other quantitative factors enabling technical analysts quantify a trend change

Top-down Analysis, the theory that changes in the economy can signal imminent changes in sector movement

Fundamental Analysis, the approach of evaluating company financials within a specific sector

Therefore, if a portfolio manager monitors the general health of the economy, the various external factors that have the ability to drive a specific sector and has a solid money management strategy they have a good opportunity to outperform the broad market.

To learn more about the sector rotation strategy I employ for my clients or how we swing trade visit my website http://www.etfupdater.com/

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://www.etfupdater.com/