Thus far, tech stocks, as measured by the ultra 3X ETF, TYH, are declining within the channel I have been watching for several weeks. The question, which my stock buddy, Judy, raised when I first posted the channel was, will the bottom of the channel hold as it has in the past? No one knows. The key for me is to wait for the reversal, and to then wade in slowly, with stops below the low of the bounce. Meanwhile, the Worden T2108 Indicator is now in neutral territory, at 58%. Only 19% of the NASDAQ 100 stocks have a MACD that is above its signal line, the lowest percentage since last November’s decline. The low in this indicator last November was 9%. The key for me is to remain defensive, and to cut losses before they grow too large.
The market deteriorated very quickly last week. The 4 down days occurred on much higher volume than the single up day. In fact, the up volume of some of the bear 3X ETF’s (EDZ, FAZ, ERY) was the highest I have ever seen, especially on Friday. The 2X Ultra short QQQQ ETF (QID) also had huge up volume. This suggests that the pros are making huge bets on the short side. The Worden T2108 is now at 21%, not yet at extreme oversold levels, but it is getting there. The GMI fell
The table below, like the one I showed in late August, shows me the wisdom of forsaking individual stocks in favor of the 2X or 3X ETF”s. Why try to find the few stocks that can beat these ETF’s when the odds are so low? Since the current short bounce began September 1, the standard NASADQ 100 index ETF (QQQQ) rose 8%. During this same period, the comparable Ultra 2X ETF (QLD) rose 17% and the tech 3x ETH (TYH) rose 21%. If I had been trying to pick the specific NASDAQ 100 stock that would outperform these ETF’s, I would only have had a little better than even chance (57%) of beating the QQQQ. But only 13% of the NASDAQ 100 stocks beat the QLD and 11% beat the TYH. So, why search for the low probability winning stock when I can just buy the Ultra ETF’s? Furthermore, a single stock can be slammed by bad news, but the ETF’s are less vulnerable to that because they represent an index or a collection of stocks. The key to trading profits is to play the odds and not to try to look smart by beating them….. Meanwhile, the GMI and GMI-R remain at their maximum
I spend so much time trying to find the right growth stock that will outperform the market. Now that we have the extreme ultra (3x) ETF’s it may be preferable to trade them. An ultra ETF is a basket of leveraged stocks or futures that attempts to outperform the relevant index. Since I like to trade tech stocks, I focus on the NASDAQ 100 index, which escaped some of the carnage last year because it contains no financial stocks.
I could simply buy the QQQQ ETF when I think the market is in an up-trend. In this way, I do not have to pick individual stocks but am invested in the 100 stocks in the NASDAQ 100 index. Lately, stocks tend to explode or implode when earnings are announced. Because the QQQQ represents 100 stocks, there is less impact from individual earnings announcements. If I want to place a leveraged bet on the QQQQ I can even trade options on that ETF.
Enter the Ultra QQQQ ETF, QLD which attempts to double (2X) the bullish performance of the QQQQ. While there is no 3X ETF for the QQQQ, there is a bullish tech 3X tech ETF, TYH. (There are also analogous bearish ETF’s for those betting on a decline in these stocks, which I will not discuss today.) Keep in mind that since these ultra ETF’s are leveraged securities, they can move more quickly in both directions–up or down.
So, if I am betting on an up-trend I could buy any one of these ETF’s to make money as tech stocks go up. The table below compares how one would have done by buying each of these ETF’s during the rally that began after 7/14 through 8/21.
It is rare that I complete an analysis whose findings totally surprise me, but take a look at this one. A lot of the pundits claim that the ultra ETF’s, leveraged baskets of stocks that try to double or triple the performance of their underlying indexes or sectors, fail to achieve their goals. So, just to satisfy my curiosity, I compared the performance of the primary index ETF’s, SPY (S&P500) , DIA (Dow 30) and QQQQ (Nasdaq 100) with those of the leveraged ETF’s. There were exact comparisons for these indexes for the 2X ETF’s, but I had to choose other, more general indexes for the 3X ETF’s. The results blew me away…
The 2X and 3X Ultra ETF’s absolutely outperformed the standard index ETF’s in the period since the March bottom. For example, while the QQQQ (Nasdax 100) index ETF rose 42.9% in this period, the QLD (2x QQQQ ETF) rose 99.2% and the TYH (technology bull 3X ETF) rose 179.4%. In comparison, the top five individual stock performers in the Nasdaq 100 stocks rose from 138.8% (JAVA) to 180.57% ( STX). In fact, only 16 stocks (16%) in the Nasdaq100 (and 23% in the S&P500) rose 80% or more. So, the choice before us is to search for the needle in the haystack individual stock that might do really well in a bull rise, or to buy one of these 2X or 3X ultra long ETF’s and ride a basket of stocks with a lot more diversification and probably less risk than owning individual stocks. The key is to discern the trend accurately and to then ride the ultra ETF with the most potential for following that trend. Some ultra ETF’s also trade options…..
There were 11 new highs and 4 new lows in my universe of 4,000 stocks on Monday. Five of the 11 new highs were on the IBD100 list from March 30: TNDN, NFLX, GMCR, NTES and CPSI. All of these but CPSI hit all-time highs, an extraordinary accomplishment, given the market’s decline over the past year. Any stock trading today at an all-time high is probably worthy of attention. I own GMCR and NFLX. One other stock on the new high list Monday is TSYS, which I wrote about months ago. It has huge recent earnings increases and has been in a steady up-trend.
I am putting more and more funds back into the market as this up-trend continues. By my indicators, the QQQQ just completed the 14th day of its short term up-trend. During that time, the QQQQ has advanced 8.7%, while the ultra long QQQQ ETF, QLD, has advanced 17.6%. During QQQQ up-trends I buy QLD. During this same time period, the emerging markets bull 3X ETF, EDC, has advanced 28.2%. Those who say the 3X ETF’s are worthless as trading vehicles (as in J. Cramer) should look at these data.
As you know, when I try to trade the trend of the QQQQ, I buy QLD (ultra long) or QID (ultra short) ETF’s. These ultra ETF’s are designed to move twice as much as the underlying index they track. Well, less well known is that there now exist 3x ETF’s, designed to move three times as much as the underlying index. I knew about the recent emergence of these Direxion ETF’s, but was surprised to see how quickly they have caught on. I have now located 16 of them, and 8 of them traded more than one million shares each on the NYSE on Friday. Here are the ones I have found. Bull ETF’s: FAS, BGU, TNA, ERX, EDC, MWJ, TYH, and DZK. Bear ETF’s: FAZ, BGZ, TZA, ERY, EDZ, MWN, TYP, DPK . One can even trade options on most of these! Remember, the leverage works both ways, they aim to go up or down at 3x the speed of the relevant index. Still, if I have a good idea of the trend, these ETF’s may prove better than going to the casino and putting everything on black or red………..
Meanwhile, the GMI