In the recent “good news, bad news” market cycle, where the markets seem poised to overreact to every bit of news that hits the wire, I look to take advantage of investor sentiment by investing in broad market, speculative ETFs, in lieu of individual securities.
There are several offerings that allow investors to profit from movement in the underlying indexes in both bull and bear markets. The straightforward ETFs, such as DIA
, simply seek to replicate the performance of the underlying index, in this case the DJIA. The inverse ETFs, DOG
, for example, seek to replicate the inverse
of the performance of the underlying index, here too the DJIA. For a leveraged position, investors can choose an ultra
ETF. There are eight choices I like to consider for this strategy:
If I am bullish on the market I will buy the following ETFs:
SPY – nonleveraged long position in the S&P 500
DIA – nonleveraged long position in the DJIA
SSO - 2x leveraged long position in the S&P 500
BGU - 3x leveraged long position in the Russell 1000
If I am bearish on the market I will buy the following inverse ETFs:
SH - nonleveraged short position in the S&P 500
DOG - nonleveraged short position in the DJIA
SDS - 2x leveraged short position in the S&P 500
BGZ - 3x leveraged short position in the Russell 1000
The coming week provides several opportunities to gauge investor sentiment. First and foremost, all eyes will be on Greece and investors will be closely monitoring market reactions to news out of the EU. Additionally, the weekly economic calendar presents significant potential for moving the indexes. On tap for the coming week are Bernanke’s assessment of the economy on Wednesday and durable goods orders on Friday.
||Existing Home Sales
||New Home Sales
Overall, market sentiment seems to be bearish. Investors appeared to be selling into the rally on Friday after seeing Wednesday's gains erased in Thursday's slide. From a technical perspective, this is a difficult market to time. Nevermind fundamentals, I believe they are largely irrelevant for the next several weeks, until we approach earnings season. That leaves political and economic news as the prime motivator of investor sentiment. Consequently, I prefer the diversification of the index based ETFs. Disclosure:
I have no positions in any stocks mentioned, but may initiate a long position in BGZ
over the next 72 hours.