SPXU And UPRO: Patience And Reasonable Expectations Are Key To Trading Leveraged ETFs

Includes: SPXU, UPRO
by: Jack Holland

After thirty years of buying and selling stocks and options starting back in 1984 when I was a young Air Force Staff Sergeant and opened my first discount brokerage account with Charles Schwab, I have come to the conclusion that patience is something I once lacked, something I had to learn, and something I hopefully now fully understand.

The lack of patience cost me several small fortunes along the way, cost me a bit more when I was learning how to embrace it, and is now paying me back as I use it as the cornerstone to my investment strategy.

And with the recent advent of leveraged ETFs I have learned that one can readily beat the market with one or two trades per year by sitting back, watching the charts, listening to the news, and embracing market trends.

Take the UPRO and the SPXU for example. For every percentage point the market moves down, the SPXU should garner a 3% gain as this fund has a leverage of 3X. The SPXU is known as a Reverse ETF. The UPRO on the other hand does just the opposite. For every percentage point that the S & P 500 Index moves up, UPRO should move up 3% or by a factor of 3X.

With today’s volatile markets, trading the UPRO and the SPXU can add substantial returns to one’s portfolio. It can also wipe out one’s portfolio if the investor puts all his eggs in one basket and bets the farm on either one of these funds and the market happens to run against him.

My suggestion is to build a balanced portfolio with at least 5 different stocks representing a cross section of the S & P 500, and then trading the UPRO or the SPXU after one ascertains a market trend in either an up or down direction.

For example, if one believes that the traditional market run-ups of November through January will apply to 2011, then adding a position in the UPRO as a sixth wheel in the portfolio would make sense.

Set a reasonable profit target, and exit the position once this target is reached. And in today’s market, with CDs returning a mere 1.15%, anything above that threshold should be considered a reasonable and prudent return. Keep in mind that conservative investors that owned only CDs during the crash of 2009 did not lose their money. This is a BIG SECRET young market mavens should learn and hold sacred—CD - C for Conservative – Conservative for the Conservation of Capital and D for Dependability as in one may Depend on their money being there at the end of the day.

As an additional caution and suggestion, should the investor hit a homerun and garner a 10% gain on a trade in either the SPXU or the UPRO: Lock it in and don’t make another trade until next year. Why spoil a homerun with a gamble on a grand-slam?

The key to this strategy is to exercise patience. Don’t pull the plug if the market corrects for a day or two. Have confidence in your analysis of the market and keep in mind that market rhetoric coming out of CNBC is generally designed to pump up stocks, so don’t believe everything you hear. And much of the market pundits focus on Europe over the past six months is balderdash, nothing but a distraction, and perhaps a convenient talking point to scapegoat the weakness in our own economy.

In my opinion, if Europe implodes, the U.S. stock market should rise in the long run as European investors will be searching out higher returns for their money.

In the meantime, do a bit of research. Many young traders today do not realize that the DOW Jones Industrial Average remained below 1000 for 80 years from 1901-1981. And, many traders today do recognize that the market has been in a major Bear Market correction for the past two years.

Disclosure: I am long the SPXU, and believe the S & P will sell off to the 1150 level as the market begins to focus on the Congressional Super Committee.

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