Swing Trading the Best and Worst ETFs

This weekend an individual wanted to learn how we trade ETFs.

I’ll start by saying there is no one Holy Grail in trading and to be successful traders only need to understand a couple of strategies.

The core strategy behind my method is to purchase ETFs during pullbacks and short ETFs during rallies. I feel my method offers less risk than traders buying breakouts and selling break downs since the majority of the trades are entered during either “oversold” or “overbought” conditions.

As many of my subscribers noticed I don’t have many breakout plays in my ETF Swing Trade Playbook and here is why:

Contrary to the “inexperienced” traders’ belief, the majority of breakouts are unsuccessful! Sure, it is easy to look at a chart and identify the best breakout points that happened in the past, but what most inexperienced traders fail to notice is how many breakouts fail – maybe this is why most inexperienced traders are unsuccessful.

Breakouts, the successful ones, don’t happen as often as people think. Realistically, there are only a few times each year an individual sector actually has the opportunity for a good breakout to exist.

Breakouts have greater risk. If a trader believes in trends, support and resistance levels the actual price in which the trend is broken, the stop loss price, is much farther away from the entry price on breakout trades. Therefore, to give the trade the opportunity to work the “wiggle” or stop loss level has to be larger than the “wiggle” for pullback strategies.

The majority of newsletters generally focus on breakouts, since my Swing Trade Playbook focuses on pullbacks and rallies, not only can subscribers diversify their trade discovery tools, but subscribers get see the trades I anticipate doing the day before I do them along with original and uncommon trading methodologies.

Sure, I do trade some breakouts, but they are not my core strategy since, technical analysis research has shown breakout type strategies fail more often than succeed. Generally, wait for the breakout to happen, confirm itself and then I buy the pullback.

I have an educational book called Swing Trade Fundamentals it details the how and why concerning finding trades, determine the correct amount to shares to purchase, determining entry points, exit points and much more.

If you would like to learn more about swing trading, day trading and investing feel free to sign up for our free weekly swing trading educational newsletter at http://etfupdater.com or click here.

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

Best & Worst ETFs

Best Performing ETFs for Friday December 14, 2007

Energy, specifically clean energy and Commodities (Gold) were the only two sector ETFs I track that were positive on the day.

PBW PwrShr WilderHill Clean Energy 1.55%
GLD StreetTRACKS Gold Trust 0.15%

Worst Performing ETFs for Friday December 14, 2007

It seems the heavy selling was in the Real estate and Banking ETFs.

KBE SPDR Series KBW Bank -4.45%
ICF iShares Cohen & Steers Rlty Ma -3.62%
RWX SPDR DJ Wilshire Intl Real Est -3.43%
RWR SPDR DJ Wilshire REIT -2.93%
VNQ Vanguard REIT ETF -2.89%

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

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/

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/

Today’s ETF Action Action and Yesterday’s Playbook

Here is an excerpt from my swing trade playbook I sent out today. If you are interested in learning gaining access visit http://etfupdater.com/ :

This was a great day for subscribers that get a glimpse of my trading plan!

As you probably already learned the fed cut rates by .25 basis points. In my opinion, I thought they should have cut by .50 basis points and from the market’s response, I think the majority of market participants felt the same way.

As many of you know, for the past few days I’ve been posting how the market has been rising on low volume (remember low volume moves to the upside are suspect), that I’m keeping the portfolio light and how there was more risk to the downside than the upside.

As I filter through the ETFs, there are no setups for tomorrow’s playbook because of today big move, so I thought I would send a sample yesterdays playbook and how much each trade is in the money.

Tomorrow will be a day to sit on my hands, let the positions work and mitigate any risk.

The image to the right is what I sent to subscribers last night. It shows the direction I attempt to play, the entry price that the ETF has to trade at to trigger an entry signal, the average volatility of the ETF and how many shares I anticipate trading.

The image below shows the trades that were triggered and how many points they are “in the money” (maximum for the day). Basically, you can multiply the “In Money” column by how many shares you would have purchased. Click on the image to enlarge it.

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

ETFs the “New Stocks”

To be successful market participants must always strive to keep learning, even participants such as myself. Because of this, I found a new product to trade and they are fast becoming my preferred trading and investment vehicles.

ETFs are a derivative (don’t let that word scare you) of a basket of stocks. They can be designed to track nearly any group of stocks offering investors and traders quick and easy exposure to a specific market, sector or sub sector of the market. They are quickly becoming my trading vehicle of choice since they are less volatile than individual stocks, are not as prone to single company stock risk and liquidity is not an issue (even with ETFs that trade less than one hundred thousand shares per day).

I started trading ETFs, Exchange Traded Funds, around 1999. Over the next few years the variety of ETFs grew considerably. For example, the first ETFs to really catch the public’s eye were “main stream” ETFs were mostly index tracking products for the Nasdaq 100 (QQQQ), S&P500 (SPY) and the Dow Jones Industrial (DIA) indexes. Now the makers of the ETFs even make ETFs for special strategies.

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/