Leveraged ETFs for trading gains
"Investors should not become overconfident; bear market rallies have caught investors off-guard in the past and this may be more of the same," cautions Glenn Rogers.
And while the contributing editor to Internet Wealth Builder believe we may be seeing only a bear market rally, he suggests, "For aggressive investors, leveraged ETFs offer great short-term profit potential."
"Even though the major indexes have posted some decent gains, I have the nagging feeling that we are witnessing a classic bear market rally.
"We've seen them before and sometimes they can occur several times during the course of a prolonged bear market and continue for several weeks.
"For example, during the tech bust of 2000-2002, the Dow dropped from around 11,800 to the 9,000 range, rebounded to over 11,000, plunged again to about 8,000 in late 2001, rallied again to the 10,500 range, and then crashed in September-October 2002 in what proved to be the final capitulation.
"This feels like a rerun of 2000-2002 (but worse) so if you are going to participate in the markets you will have to be very nimble. It is likely there will be more pain ahead but if past pullbacks are any guide if you have stayed in on the way down then you need to continue to invest on the way back up.
"The sectors that are most likely to recover first are likely to be the financials, materials, and energy, probably in that order. I've talked about them before but the easiest way to play them on the way up is through exchange-traded funds (ETFs).
"For aggressive investors, leveraged ETFs offer great short-term profit potential but you need to watch them carefully because they are very volatile. There are now leveraged ETFs that run at three times the underlying value of the stocks they hold.
"One example is the Direxion Financial Bull 3X ETF (NYSE: FAS). It came out last November and opened at $32.68 but has since fallen as low as $2.32. The shares are now in a buy range for active traders -- but beware of the volatility.
"If you like energy at these levels (and I do), look at the Direxion Energy Bull 3X ETF (NYSE: ERX). It has rallied from its low of $16.23 but is still more than 60% off its high of $62.63.
"Note that neither of these are formal recommendations. Because of their volatility and the need for constant monitoring, they are only suitable for very active traders. But if you fall into that group, take a look at them.
"My view is that although this is a scary market, there are great profit opportunities for those with the stomach (and the cash) to handle the risk.
"That said, the one traditional investing maxim I still like is dollar cost averaging. Keep buying a little each month and over time you'll be closer to being right than if you didn't participate at all."
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