Saturday, January 17, 2009

Broadening Horizons

Experience has shown that many subscribers are like most retail traders in that their trading is limited to buying stock and hoping it will go up in price. As most regular readers know and as anyone who has read "Trade Your Way to Wealth" is aware, I am a believer in playing the direction the market is moving. Roughly 80% of the stocks will be moving in the direction of the market, and if I want an edge, it makes sense to me to try to select candidates that are going in the same direction as the overall market. I don't mean to say that contrarian plays can't work; it just seems less likely to provide the edge we seek if we try to grab from the 20% rather than from the 80%.

It is hardly a secret that the markets have been extremely bearish for some time now and so far the bearishness continues. If we are determined to be bullish players, it seems obvious that a bearish market is a great time to stand aside. We should be aware, however, that there are now many vehicles available that permit us to buy shares that are specifically designed to move up as the markets move down. I often buy positions in the short and ultrashort vehicles provided by ProShares that enable me to profit on downward moves. These devices are closed end funds that seek daily investment results that correspond to the opposite (or inverse) or in the case of ultrashorts, twice the opposite of the daily performance of a market, sector, or index. The ProShares UltraShort Dow30 (DXD), for example, seeks investment results that correspond to twice (200%) the opposite of the Dow Jones Industrial Average Index. These ETFs (Exchange Traded Funds) trade like stock and can be bought and sold throughout the day and can be traded on a technical basis. Many are now available including the ProShares UltraShort S&P500 (SDS) and the ProShares UltraShort QQQ (QID). There also are closed end funds that allow a trader or investor to play sectors to the downside since they are designed to move up in price as the sector moves down. The ProShares Short Oil & Gas (DDG) is just one example.

Traders, as always, should be aware of the risk in taking positions in these vehicles. Some, for example, are thinly traded and may have liquidity issues as a result. For that reason, it is worth checking average daily volume, particularly on the shorts and ultrashorts that are tied to sectors rather than to whole markets. Control of size of potential loss is also critical, as always, and the trader needs to be aware that the ultrashorts while providing the possibility of a return equal to double the opposite of an index, also can lose money at double the move of the index (in other words, really fast) if the index starts to move up. Stops and exit strategies are important here as in all trading.

The point here is that there are ways other than shorting a stock or buying a put that a trader or investor can profit from a downward move in a market or a sector. As is always the case, the trader and investor needs to gain education and practice before putting money at risk.

On another subject, in order to make sure I have notified all my personal coaching students, I am having a free event for them in Scottsdale March 21st and 22nd where I'll do a full day presentation on the 21st on volatility trading and dinner will be on me. On the 22nd, we'll have a laid-back time where everyone can exchange ideas and the students can get to know one another. If you haven't already contacted me, please make sure to let me know whether you are coming or not. I am hoping to make this an annual event. Those who are interested in individual coaching sessions can contact my office at 480-248-9996. I am still offering a subscriber special for a one day one-on-one session for $2,500 ($2,100 for paid subscribers). There are no openings until April and I do limit the number of students significantly each year. The offer will only be open to those who call before February 15th to schedule a session later in the year.

Finally, I am honored to have been selected as the featured author this month by Check out their website where you can see my recent interview and explore some valuable information in their stock reviews and analyst exchange.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved

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To comment on Bill's article click on the "comments" link below.


Earl McHugh said...

I have seen recent comments on the " double " performing etfs like quid, etc. indicating that some of these funds only promise to double to performance, for the
DAY, of the index or security to which they are dedicated. Can you tell us a way to find the key to which ones do this other than by going to the prospectus of the fund in question? Hope you have time to comment on this. Thanks.

Anonymous said...

Bill, thanks for another cogent article. Would you please comment on the pro-shares recent dividend, which was announced the same day they distributed it, and knocked all their stock prices down significantly? Anyone who invests in these funds overnight should be aware that this happened at the end of the year. The dividends were very large- and the funds have not recovered their prices, despite the bearish direction of the markets since the distribution. Thank you. E. Stein

Bill Kraft, said...

Hi Earl. Thanks for writing. You emphasized the word "day" regarding the ETFs that are designed to provide double the inverse of the market so I should make it clear that that is their objective day by day, in other words every day. Those denominated "UltraShort" are the ones that attempt to provide double the inverse of an index while those denominated "Short" are designed to provide the 1:1 inverse. ProShares offers a number of each. Hope that helps.
Bill Kraft

Bill Kraft, said...

Great point, E Stein. ProShares did announce capital gains distributions for its funds on December 22d with an ex-date of December 23rd and a record date of December 26th. The funds made relatively large per share distributions, the ProShares UltraShort (QID), for example around $9.50 a share with others such as the ProShares Ultrashort Small Cap around $28. These distributions naturally had the effect of reducing share price as of the ex-date by the approximate amount of the distribution. However, shareholders got the distribution and still had the value of their shares. The announcement, I believe, was made after market hours on the 22d and someone who bought shares that day would have been a share owner on the record date since Christmas, of course, was a holiday. Those buying shares later would not have gotten the capital gain distribution, but would have purchased the shares at the discounted price. Thanks for writing and for raising an important point.
Bill Kraft

Robert said...

Hi Bill,

First, great article, as always! I'd like to hear your comments on the recent negative articles that have appeared warning about the "scam" that the Proshare Ultrashorts are, as the evidence seems overwhelming that they are not the "perfect" short investing vehicle they are presented to be. Here is a link to one such article I read:

Many thanks!

Bill Kraft, said...

Thanks, Robert. I agree that the ProShares short and ultrashort shares are not a perfect investment vehicle to play the downside. My personal experience, however, has been that the ones in which I have traded worked acceptably well for me. I would not consider them to be a "scam" and should emphasize that there is no perfect investment vehicle. I was able to read the article you suggested and thank you for bringing it to my attention. I agree these positions can be extremely dangerous if for no reason other than their volatility, but for some, volatility is what is sought. No doubt, these positions need to be monitored closely when entered and accompanied by tight stops. Some as I indicated also are quite thinly traded and, for me, that is almost always a reason to exercise extreme caution if not to avoid altogether.
Bill Kraft

Anonymous said...

Bill, thanks for your weekly articles. I purchased your book last summer and enjoyed reading it a great deal. I have a couple of questions about your personal coaching. Is there a minimum trading account value (in cash) that you suggest in order to make the cost of sessions worthwhile for the prospective student? You have a temporary special for a one-day session. Is there a special for the two-day option?
Regards, Deej

Bill Kraft, said...

Hi Deej. There is no minimum trading account size necessary to sign up for the coaching. I would suggest, however, that someone seriously interested in trading would be best served to start with a minimum account of about $20,000. Someone who looks at themselves as an investor rather than a trader can start with any amount. I currently have no special for a two day session so that is $5,000. The regular prices before the special discount are $5,000 for two days or $3,000 for one day. As you know, the current special for a day is $2,500 for subscribers to the Newsletter or $2,100 for paid subscribers. My experience has taught me that the one day session works best for students since it is generally quite intense and a second day immediately following the first tends to yield diminishing returns because of overload. In the past, I have given students who return later for a second day a break on the price and I am always willing to make some adjustment in those circumstances. Thanks for your inquiry, Deej. You can call the office at 480-248-9996 if you are interested in taking advantage of the special.
Bill Kraft

Anonymous said...

Bill- I don't know if you are going to read this, almost a week after your column, but I wonder if you have found ( as some have written) that purchasing in the money put options on the QQQ is a more effective means to short NASDAQ than going long by purchasing shares of QID? If you have an opinion on this, I'd sure like to read it! Thanks. E. Stein

Bill Kraft, said...

Hi, E Stein. Just as a comparison, as the Q's dipped from Jan 6th to Jan 20th, they moved from $31.28 to $27.96 or $3.32. If one had in the money puts with a delta of -.80, the puts would have gained roughly $2.66. Meanwhile, the QID moved from $51.49 to $63.12 or a gain of $11.63. Obviously that is only a snapshot in time, but I think it answers your question.
Bill Kraft

Anonymous said...

Bill-thanks for your prompt response-insightful as always. E. Stein