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Kate Stalter is a columnist for, and Morningstar Advisor. Stalter currently hosts “The Small Cap Roundup” on, every Tuesday and Thursday at 11 a.m. Eastern. She serves as editor of the “Low-Priced Leaders” newsletter, also at TFNN. From 2001 until 2010, she... More
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  • Use the VIX to Time Market Opportunity

    Investors are best served being alert for new opportunity amid market volatility, says E-Trade’s Dave Whitmore in Part Two of his interview with He suggests watching a weekly chart of the VIX volatility index to gauge upside spikes that often precede a market turning point. (You can read Part One of the interview, in which he talks about indicators to watch, here.)

    Kate Stalter: Let’s talk a little bit about the recent and current market volatility. It’s something that’s a lot of traders and investors understandably have gotten spooked by. But talk about some of the opportunity it can offer, Dave.

    Dave Whitmore: Volatility is often tracked by an instrument that many people know, called the VIX, the volatility index, and it expresses how much expectation for high price volatility is in option prices right now.

    If you were to go to a longer-term chart of the VIX and look at the weekly over, say, five years, you’ll see that many times the VIX has an extreme spike—and they’re very visible. You can see these spikes. Very often those mark low turning points in the equities markets.

    Right now, in this most recent volatility, we’ve just experienced, the weekly VIX spiked up to 48, which is almost exactly where it was back in the extreme volatility of May 2010 and June 2010 when the flash crash occurred. So we’ve spiked right up to that same point.

    Whenever this has happened, it usually expresses extreme pessimism and fear that is creeping into the market, and that can often point to opportunities.

    Here’s the thing about trading this way: It means thinking contrarily. It means being brave enough to step up when others are stepping away. Thinking that way is sometimes difficult, but there is a lot of literature that says when all about you are losing their heads, something wrong with that line maybe you could help me with that quote Kate,

    Kate Stalter: Remain calm while others are using and losing their heads, right? Something like that.

    Dave Whitmore: Exactly, so that’s the idea. If we’re in this extreme period and that means the VIX is telling us that we are in “oversold territory” and due for a bounce, then the brave trader will be looking for long opportunities in that situation.

    What would one do to find those? Sometimes I think about Investors Business Daily. They have a big section on the best industry groups.

    Many prudent traders say the place to look for coming strength is to see where relative strength is right now. One little exercise I use to see where relative strength might be occurring on a sector basis, is I use point-and-figure charts from

    Point-and-figure charts will give you a mathematically calculated assessment of whether the stock is in a bullish trend, a bearish trend, and it will even give you a price objective on there. You glance down, and it actually tells an interesting story about where there’s strength right now.

    There’s a lot of the strength in the sectors right now that are often thought of as defensive groups. You’ve got utilities, health care, and consumer staples showing strength. But at the same time, technology and consumer discretionary are also showing strong point-and-figure chart patterns.

    This is a little bit interesting: You’ve got consumer discretionary, which is sort of a bet on a healthy consumer and improving economy, but at the same time defensive sectors like utilities, consumer staples, and health care.

    At any rate, my point is: If I was to take today’s volatility as an opportunity, and the VIX seems to be saying that that might be the case, and I was to go fishing, I would go fishing in ponds where there might already be strength.

    I just gave you one example of where you could go find information like that. There’s a variety of others. I would imagine that most brokerage firms have tools just like E-Trade that allows you to see sector strength and weakness. That’s the kind of pond I’d be fishing in.

    Kate Stalter: In addition to looking at sector strength and weakness, when investors or traders are looking at the actual instruments they could be using, what are some strategies? For example, ETFs or individual stocks? How would they go about that?

    Dave Whitmore: The ability to make an investment, sort of a tactical investment on a sector or an industry group, has never been easier with the advent of exchange traded funds.

    Just to back up, exchange traded funds are index funds that happen to be traded on an exchange, and they have the characteristics of stocks, so they have continuous pricing through the day. You can use leverage, such as margins. There are options on many of them, and again, they trade throughout the day. It’s a viable trading instrument.

    In each of these cases, the nine primary economic sectors, the Select Sector Spiders. There’s one for each sector. Many sectors then have industry group ETFs within them.

    It sort of goes back to the discussion about assessing your own risk. If the investor has first made a hypothesis about what’s going on, like, “I believe consumer discretionary will do well.” If you believe that’s your stance, step one, the simplest way is to take a look at a sector ETF.

    But maybe you want to put a little more elbow grease into it, maybe you want to take a look at that sector, dig down into it and attempt to find stocks that appeal to you that way. If you were to do that, once again now you have the capability of using margin leverage if you want to double the leverage that you’ve got, use a dollar to buy two dollars worth of stock.

    Or you’ve got a variety of option strategies, and option strategies, as I’m sure you know, let you turn that risk dial very finely. You can get extremely aggressive and you can get rather conservative using option strategies. You know that’s the sort of thinking sequence that a trader can go through.

    First point, what do I think the trend of the market is, what do I think the mood of the market is, do I want to be long or short, which side do I want to be on? The trend is my friend, right?

    Second part, which ponds do I want to fish in, where do I think they’re biting, where do I think there’s strength or where’s weakness to avoid?

    And then within we have to make sure we’re educated in our product choices, and find a vehicle that matches up best with our risk tolerance and our pocketbook.

    Sep 30 10:47 AM | Link | Comment!
  • 4 ETFs to Grab in These Volatile Times

    There are plenty of ways for traders and long-term investors to capitalize on the current market conditions, says trader and radio host John Netto. He believes gold ETFs are still good trades, and has some suggestions for bolstering the trade by using out-of-the-money options as well.

    Kate Stalter: We are talking today with John Netto, and John before we get into discussion of the markets, tell our listeners a little bit about what it is you do.

    John Netto: I’m a professional speculator. I trade for a living. I also speculate on sports for a living as well, and I host a show called Sports X Radio, which can be heard on, as well as on Sports Byline USA.

    What I do is bring the world of Wall Street to the world of odds-making, and bring those two together. This is an industry that is growing quite a bit, and a lot of the market-making models, a lot of the techniques and strategies used to trade, you can also use when it comes to handicapped sporting events as well.

    Kate Stalter: I wanted to ask you for your current take on the market, given all these models that you are using. What are some actionable ideas that individual investors can take advantage of right now?

    John Netto: When it comes to putting forth actionable ideas, it is key to understand what an investor’s threshold of risk is: How much pain they can take, what their return is.

    Assuming, in a vacuum if you will, that a person is looking for the best risk-adjusted return possible and they are comfortable taking on some greater exposure, I think there are a few things you want to do right now.

    Clearly we have seen a bounce back this week, following what has been a very tumultuous and high-volatility environment from the previous weeks. As a result of that, implied volatility has gone up quite a bit and premiums on options have gone up quite a bit, as well.

    Also readBullish…with Some Reasonable Doubt

    So if you have longer-term holdings, if you are a person that is going to be retiring in the next five, ten, or 15 years, if you are a person that has a lot of time behind you, depending on where you are at, I think that one way to play the market in the next couple of weeks is to buy something like gold.

    I think that gold is a much better safe haven then the underlying equity markets, and the options behind gold right now are priced pretty richly.

    So by stepping in and buying the Market Vectors Gold Miners ETF (GDX), it is the ETF that has the top 30 gold miners’ stocks out there, you can buy the GDX between $55 and $59. Around there, this week, is where it has been trading.

    You can sell an out-of-the-money call on it up near $63 to $64 for three months down the road and earn a nice return. Because I think what we have seen from the GDX is, when it undergoes the kind of technical damage that it has done—even with gold as well—it does take some time to consolidate, but net-net the secular uptrend in the gold market is still very much in place.

    So I think that buying the GDX and selling some out-of-the money calls against it is a great way to build a longer-term portfolio, and take advantage of the short-term implied volatility priced into options.

    Kate Stalter: Now how about for investors or traders, John, who want to just get into equities, the equity trade either through individual stocks or ETFs, any ideas for that group?

    John Netto: Sure, yeah, and again I think for all the ETF traders out there, whether you are trading theSPDR Gold Trust (GLD), which is the ETF for gold, or the GDX, which is the ETF for the gold miners, or even the PowerShares QQQ (QQQ) or the Spyder Trust (SPY), I think it is a market right now that you can look to sell rallies and look to buy breakdowns, in terms of at least this week, anyway.

    Also readThere’s Gold in Them Thar Stocks

    I think longer term, the market is going to be in trouble this fall. What we have seen in terms of volatility is a harbinger, as opposed to an aberration, for things to come. So looking at where the S&P is at, and looking at the balance we have seen this week, I think we are going to head back down and test those lows one more time after we work off some of this oversold sentiment.

    Kate Stalter: For longer-term investors, any ideas there? Should they continue to be defensive, or start looking at some new watch list names?

    John Netto: I can’t think of how to be more defensive then to own gold. I know I keep coming back to this, but since Operation Twist came out from the Federal Reserve meeting last week—and even leading up to that actually—the dollar has undergone a nice little pop. I’m not sure that that move on the dollars is going to abate any time soon.

    What I do think we will see, though, is gold rallying with the dollar. So you can trade the dollar index—DXY is the symbol behind the dollar index if you want to follow that—and you can just be aware of where the dollar index is.

    You can trade the ICE futures in terms of the dollar index itself, CME futures if you want—you can short the euro. The euro, I think, comprises like 56% of the dollar index as it is situated right now. So being short the euro or selling the euro on balance…

    I think for the longer-term investors, when you take a defensive posture, you want to be long gold, you want to be exposed in dollars, you want to be short euros. I think that proves a great way to hedge, or at least a nice overlay to what your longer-term portfolio consists of.

    Kate Stalter: You just talked about shorting the euro. How about any instruments that if investors have continued to hold, that maybe they want to consider exiting at this point?

    John Netto: Again it all depends what your mandate is. It all depends what your angle is. If you are committed to staying long a certain percentage as a buy-and-hold path to investment strategy, than you are sort of stuck, or you are going to ride the ship, I guess.

    If you want to take a more active approach, though, I do think the GDX stocks are shorter term, and are going to go through more of a consolidation choppy period. Owning them and then selling out-of-the-money options against it is a great way to benefit from a rising but choppy trend up.

    So I would just reemphasize that point. In looking over all the currency space, I think that the Japanese yen is another space that I can see that breaking down. The dollar-yen rate has been flirting with that 75.50 to 76 level. It wouldn’t surprise me if we ended up down at 72 or 71, despite the coordination attempts by the Bank of Japan and some others to keep it elevated.

    Also readYen/Gold Ratio: A Window Into Japan

    Sep 29 11:35 AM | Link | Comment!
  • 3 Technical Indicators to Start Using Today

    Moving averages, the relative strength index, and stochastics can improve your market-timing decisions, recommends Dave Whitmore. In part one of his interview with, he also discusses the importance of having a clear strategy every time you enter a trade, and of understanding your own risk tolerance.

    Kate Stalter: Today I’m speaking with Dave Whitmore. He’s the senior strategist of trading education for E-Trade. Dave, E-Trade recently sent out a news release that had some tips for investors in the volatile market. One of those that I found interesting was “remain calm and maintain perspective.” Give us some perspective on the technical performance of the indexes lately.

    Dave Whitmore: Whenever you get a market that shows big sudden moves, whenever we see big jerks in volatility, one of the pieces of advice that any prudent investor should follow is to try to maintain perspective about what’s going on.

    One simple way to do that is to look at charts and various time frames. It’s a simple exercise, but it’s an important one to do to. Take a look at a chart; most of us probably are looking at a one-year daily chart. Flip your chart program over and take a look at a weekly chart, and pull back and look at a weekly across three years or five years. You can get a very different perspective.

    For example, in today’s market right now, the one-year daily chart, indeed, it looks like we could have entered a downtrend. The 50-day moving average seems to be moving down, but when you pull back and look on a weekly chart, you’ll see that this down move is somewhat contained within the same kind of volatile movements that occurred a couple other times in the uptrend.

    In fact, some of the technical indicators look a little bit oversold. If you were to look at, say, the RSI and the stochastics, for example, on the weekly chart. They look like they’ve bounced off oversold conditions.

    Step number one is to think in term of perspective.

    Kate Stalter: Which key technical indicators are some of the basics that traders should begin to use? You mentioned moving averages a moment ago, for example.

    Dave Whitmore: Right, so I made three references there. First of all, moving averages. A moving average will smooth a jagged trend, and one of the techniques is when the moving average is moving in a direction, as the 50-day moving average is right now—it’s moving down—that’s deemed to be a downtrend.

    The other two technical tools that I referenced are the RSI and the stochastic. These are mathematical calculations that simply measure how far the price is stretched from some sort of an average or a mean. It will express when positions might be oversold, meaning they are due for a bounce back, or overbought, meaning they’re due for a pullback.

    On the longer-term chart, both the RSI and the stochastic are moving up and out of oversold territory, so that’s the kind of different perspective that you get by using the longer-term chart as compared to the daily chart.

    Kate Stalter: One of the other tips that E-Trade offered in the press release was “review risks.” Talk a little about how to do that.

    Dave Whitmore: First of all, whenever you enter the position I hope you reviewed your own risk tolerance, and your sense of what the trade you were putting on, or the position you were putting on, was going to do.

    First, you need to understand the risk that’s inherent in any position that you have. There are a variety of tools for that. We have a risk analysis tool right within the E-Trade Web site. We use a company called RiskGrades, and they will give you a numerical representation of how much risk is in a specific position.

    Then you should also know what was the expected risk and what it was you put on, when you put that trade on.

    Finally, you have to know what you can tolerate. Again, this goes back to questions that should have been answered before you entered the trade. If you’re a trader, what you might need to consider is: Are you using the right vehicle for the investment or trading hypothesis that you had?

    I mean, let’s face it, to say you were, for example, bullish on technology could have been effected in a variety of ways, each of which would have differing degrees of risk. Maybe one is just to buy a big popular technology stock. Maybe another one is to buy a technology ETF.

    Maybe another one is to buy one of those instruments on margin and leverage your position, and finally you could have used options to implement the position. All of these have differing degrees of risk, even though they’re all bets on the same particular idea. Traders and investors have to think about these things differently.

    But for a trader, it’s not just were you correct in your hypothesis on what the underlying was going to do, but did you choose an instrument, did you choose a degree of leverage that fits with your risk tolerance? If things are reacting differently than what you thought, it’s time to reassess that, educate yourself, and learn about what those different instruments are, in order to effect a trade.

    Kate Stalter: It seems like just boiling that down to the most basic: Go into every trade with some kind of plan, not just buying. It seems like a lot of traders don’t have an exit strategy.

    Dave Whitmore: Having a signal to you that tells you a stock is going up, for example, is not a strategy. The strategy is having a signal, a catalyst, if you will, whatever event makes you decide that an idea is either bullish or bearish for you.

    But the strategy comes with defining how you’re going to enter that trade, how much of your capital is going to be committed to that trade, and as you just pointed out perfectly, how are you getting out? What is your target? Where is your pain point? That would be where you put your stop-loss, that’s the bailout, that’s the jump-out point.

    You need to, on each trade, have a sense of the ratio of that. How much upside potential is there, and how much risk am I willing to take? That’s one of the most basic steps of assessing the risk in a trade. Every investor needs to do that.

    Sep 28 8:50 AM | Link | Comment!
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