ETF – Professional Technical Analysis and Money Management Organizations

I believe, to stay on top of their game, money managers must constantly evaluate new market concepts, revisit old trading journals and network with their peers.

To accomplish this task, I belong to a few professional organizations. One of which is the Market Technicians Association (http://mta.org/) and I joined for a few reasons:

1. To learn more about technical analysis to improve my personal trading
2. To meet other professional Market Technicians
3. To help promote the use of Technical Analysis

To Learn more about the MTA click here and to learn more about what a market technician does click here.

Another organization I belong to is the National Association of Active Investment Managers (NAAIM) to visit the organizations website click here.

Each organization has a different focus, but together, they combine the knowledge, insight and camaraderie I feel a money manager needs to succeed.

If you have any questions or would like my opinion about how you can benefit, feel free to contact me. For our contact information click here.

Michael 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

ETF Swing Trading – Hedging The Portfolio

I’m a trend trader and trend traders tend to weight their portfolios more heavily in the same direction of the trend. Unfortunately, when trading trends, the portfolio tends to give back unrealized profits during counter trend moves, so to mitigate our drawdown I hedge the portfolio.

For example, say there is a firm called Capital ETF Management, it is near the end of the quarter and the ETF Portfolio Manager deems a correction is imminent. He wants to secure some unrealized gains instead of buying ETF options or liquidating positions.

The money manager calls M1 Consulting LLC (that is my consultancy) and they engage us for additional insight as to how they can reduce risk should a correction occur. Capital ETF Management has a portfolio consisting of the following Exchange Traded Funds a Wisconsin ETF, Copper ETF, Alternate Energy ETF, Wilshire 5000 ETF, China ETF, Precious Metal ETF, Brazil ETF and an Emerging Market ETF.

How would I approach the scenario?

First, I need to determine what security has a near perfect correlation to the portfolio (keep in mind this could be a few different securities depending on the portfolios composition).

After further analysis, we realize the Capital ETF Management portfolio has a near perfect correlation with a Profund’s ETF.

Now I can:

Calculate the estimated volatility of the portfolio
Calculate the estimated volatility of the Profund’s ETF being used as a hedge
Determine when the hedge should be put on
Determine when the hedge should be taken

Note: This should all be calculated and determined before the hedge is put on.

Once I calculate the volatility for the portfolio and the ETF being used a hedge I can determine how many shares must be purchased or sold to put the hedge on.

To learn more about hedging or for more swing trading education visit us at http://etfupdater.com/freeinformation

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