Skip to main content

Using Inverse ETFs - have we learned anything yet?

When I first began writing this blog, I was fascinated with the ProShares Ultra ETFs. I believed that by using the TradeRadar software, I would be able to time the market with sufficient accuracy to profit in upward trending markets with the ultra long funds and profit in down markets with the ultra inverse funds.

The reality has turned out to be more difficult than I anticipated. As some of you who commented on those early blog posts knew, market timing is no piece of cake, even when you have a software tool to help. It seemed that I ended up chasing trends that did not play out with sufficient duration to make the trade worthwhile.

My trading record, such as it is...

My record has not been encouraging. In my first attempt at using an ultra inverse fund, I purchased QID, the Ultra Inverse QQQ ETF, in early February, before the market broke down later that month. The NASDAQ began to recover soon after and I ended up losing over 5% on the investment because I held QID too long.

Without announcing it on the blog, I dabbled in SKF, the inverse financial ETF and ended up chasing a short-lived trend and losing money again.

I decided not to fight the bull market and bought QLD, the Ultra QQQ ETF, and made a few percent on the investment. I sold too early after a tough day in May reminded me how these ultra funds fall twice as fast as the underlying index.

Trying to be a consistent investor, I thought that if I am selling QLD, I should be buying QID. And so I did. Well, the bull hadn't given up quite yet and I have been underwater ever since. Even with today's plunge in the markets, I am still just shy of a profit.

Another trade that I haven't announced on the blog is SRS, the Ultra Inverse Real Estate ETF. My confidence in playing the inverse funds was lacking so I didn't add it to the public portfolio. This time, though, I should have bragged about it since SRS is now showing double digit gains as REITs continue to tank. I bought it soon after the post where I discussed how IYR, the iShares Dow Jones US Real Estate ETF, had fallen out of a trading range and looked very vulnerable.

So what have we learned?

Market timing can get you in trouble! Chasing short-term trends in the major averages is a dangerous game and that is what I was trying to do with the trades in QLD and QID. Stick with long-term trends but only if you feel comfortable recognizing them. After today's rout in the markets, is anyone ready to say the long-term trend is down? Not yet. So this time I am restraining myself from jumping into an inverse fund like SH, even though it looks like the S&P 500 is flashing a TradeRadar SELL signal.

Hedging may be a safer approach. Devote a small portion of your portfolio to an inverse fund and buy when it is cheap. If the corresponding index falls, you already have a position and you are not in a situation where you are chasing after a trend. When everything else is going down, you have at least one investment that is going up. That is how I have been viewing my latest investment in QID.

Industry specific events can be profitable if you are alert to how those events are unfolding in the markets. There has been a tremendous amount of discussion around problems in real estate, especially related to home builders. REITs, however, did not really start plunging until mid-May when they fell out of the trading range I mentioned above. When confronted with a solid move that looks like it will play out over time and over a wide price range, the inverse ETFs become a good choice.

Comments

Anonymous said…
Perfect example of what not to do in the market. The only people making money timing the market are brokers through fees and uncle sam through taxes

Popular posts from this blog

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position.

This first post in the series starts at the beginning: getting good investment ideas.

Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets.

As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professionals and …

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas.

Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what to lo…

Free stock alerts, Trend Leaders, Bollinger Band Breakouts and Cash Flow Kings for Jan 16, 2009

This post is to announce that the latest list of free stock alerts is up and available at Alert HQ. Each week we scan over 7400 stocks and ETFs looking for fresh BUY and SELL signals. We apply a combination of proprietary and standard technical analysis techniques to identify those stocks that are beginning to move. Our goal is to identify stocks or ETFs that are undergoing reversals, either to the upside or to the downside.

Wait, there's more...

We also use the Alert HQ process to generate more free lists of stocks and ETFs

The first byproduct of the Alert HQ process is the Trend Leaders list, our collection of stocks in strong up-trends. These stocks are registering strong signals using Aroon analysis, DMI and MACD. They are also above their 50-day exponential moving average. This week's list is now available at the TradeRadar site on the Trend Leaders page.

As another byproduct of the Alert HQ process we have generated a list of stocks that have broken either above their upper…