CTMPR

After a nice short term run in the leveraged ETFs that were mentioned in my last article it seems the stock market ran into a brick wall. I dumped the Leveraged Financial ETF as well as the Leveraged Biotech ETF because as I said in the last article those are the two most dangerous trades. The financials are dangerous because they remain trapped in a grueling bear market that doesn’t seem to have a bottom. The Biotechs were dangerous for the opposite reason, they had run up significantly over the past year. While both will most likely be huge winners at some point, I’m not going to wait it out. It’s difficult to stay in losing trades with leveraged ETFs because they can really beat you up and even when the trend turns it’s hard to make up those losses.

I stuck with the Leveraged Oil ETF – ERX as I quickly was up nearly 30%. In hind sight I wish I would’ve taken profit there are well as I could easily give the whole profit back but as a long term energy bull i hate getting out. I also stuck with my Leveraged Silver ETF (AGQ) and the Junior Mining ETF (GDXJ) as metals remain in a constructive pattern (especially gold). I won’t initiate any new stock market positions until the S&P 500 either regains the 200 day moving average or completes a successful test of the 20 month moving average. You can see by the chart below that the 20 month moving average is just above 1200.

As you can see the 20 month sma was tested last summer just before the huge QE2 Rally began. I’m not sure what the catalyst will be for this year’s rebound but it definitely looks like there will be a test of that level. If that level fails you will want to be completely out of stocks as it would probably signal that the U.S. was headed into another nasty recession. The odds of this outcome are very low at this time. The fed seems like they would rather continue to provide excess liquidity instead of letting the economy tank once again.

It feels like deja vu all over again…… Since May the stock market has been in a funk, commodities have back off and precious metals had been acting bearish (silver has been smashed). Junior mining stocks have been one of the hardest hit areas dropping over 20% and even the resilient oil stocks have managed to pull back a bit.

One of the worst performing sectors of the market over the past few months has been financials. In fact, if you look at a 6 month chart of the financials (represented by XLF) you can see that it is up only 2% since the start of QE2 versus a 20% gain in the S&P 500.

About a week ago investor sentiment reached extreme lows regarding the stock market and precious metals. When you are in a seasonally soft period and investor sentiment reaches a negative extreme it’s always a good time to put some money to work.

Since my background is in future’s trading I tend to like using a bit of leverage, but since I don’t watch the markets as closely as I used to I tend to favor leveraged ETF strategies instead of futures contracts. Most leveraged ETFs are basically a futures position that provides 200-300% leverage disguised as a stock. It’s not for everyone, but compared to futures trading it feels like a walk in the park. Also, it allows you to have a little more diversification and use a little bigger stop without risking such a huge percentage of your capital. I wanted to buy a combination of the things that have held up best (biotech, oil stocks & gold) and the things that are most beaten up (silver & financials).

I split my investment evenly between these 5 areas and chose the investment vehicles that I thought would provide the best risk/reward scenario. For the beaten down financials I chose the leveraged financial ETF (FAS). This ETF from Direxion tracks the Russell 1000 financial index and provides 3x leverage, so it is capable of substantial moves. If there is a modest recovery in financials this fund can provide a strong return.

In the precious metals I chose to invest in the junior mining stocks ETF (GDXJ) instead of buying physical gold. This is because junior mining stocks have retreated 22% while gold has remained near all time highs. This divergence was very likely to play out in favor of a rise in gold mining stocks. When gold mining stocks rally the juniors tend to outperform the larger companies, so even though it’s technically not a leveraged ETF the companies themselves tend to be small and highly leveraged to the price of gold. The interesting thing about Gold was that even though gold remained near all time highs, investor sentiment had plummeted to 3 year lows. This provides an excellent low risk opportunity.

Unlike gold, silver prices have been smashed since topping near $50 an ounce this spring. They had corrected nearly 40% off the highs and all the weak longs were wrung out of the market. This was confirmed by a precipitous drop in the level of open interest in the comex silver futures. Normally I would’ve bought the silver futures but this spring’s volatility left a sour taste in my mouth (& some painful losses) so this time I chose the Leveraged Silver ETF (AGQ) from ProShares. This fund is a 2x leveraged fund and seeks to replicate 200% of the daily London silver price fix. It was the best performing ETF of 2010 and will shine again this fall if silver heats up. Silver recently broke out of it’s downtrend so things are looking promising.

Biotech has been in a very strong bull market versus the S&P 500 over the past year. Normally I shy away from markets that have already had an extended move but Biotech is one of those areas that can continue to run much longer than anyone expects. I’m participating by purchasing the leveraged biotech etf (BIB) and am using the recent low as my stop.

The last area I chose was the Oil Sector as oil prices have backed off their highs but remain high enough to offer tremendous profit potential for the entire oil sector. Due to my fondness of leverage once again I chose the 300% leveraged oil etf (ERX). This ETF is not for the faint of heart as it regularly moves $3-4 per day and will even move 10-15% in either direction in a very short period of time. As you can see this ETF has crushed the S&P 500 over the past year and I will exit this trade if we take out this summer’s low (around $60).

The time to put money to work is when investors are the most pessimistic and are scared of the market. The levels reached this summer in both precious metals and the stock market created great entry points. The odds of making new lows in any of these ETFs appear to be quite slim, but if it occurs I will not hesitate to exit the trades. If Bernanke decides to purse further QE strategies these investments will soar!

On the other hand, we are close enough to the summer lows to use them as Stop Points to exit with small losses in case we are wrong. This is the type of situation I try to look for in markets.

Recently I was talking with a friend of mine who sells Auto Insurance in Fargo ND and was asking him about ways to save money on our 2 teenage drivers. It turns out I’m far from the only one who has interest in this topic as kids between the age of 16 and 25 are the most expensive group to insure. This past year our daughter got a couple minor tickets and had a minor accident so the first question I had for him was whether this was going to affect our (annual) renewal rates. Luckily I found out that in the state where I live minor traffic offenses are not reported to your insurance. Also, since the damage in the accident was less than $500 we did not have to report the accident so fortunately our rates should not be affected.

It isn’t just parents of teens that are looking for ways to reduce their car insurance costs. He also told me that since the recession began he has seen a steady increase in the number of people searching for ways to reduce their insurance costs. In fact, instead of talking about coverage options first many are initially asking how much is car insurance as their primary question.

He gave me several tips on how to minimize the cost of insurance and many of them are factors that we control.

#1 – Shop at several different companies. Each company competes for different types of risks so there is no such thing as a company with the best rates for everyone. That’s why auto insurance ads say “Drivers who switched saved an average of $450” instead of “By switching you can save $450”. Your unique situation will determine which company will give you the best rates.

#2 – Check out a variety of deductibles on both your collision and comprehensive coverage in order to see how much it affects your premiums. Sometimes it pays to go with a slightly higher deductible and save the extra premium, but not always.

#3 – Avoid foolish traffic tickets. Things like rolling through a stop sign can really cause your rates to go up. The same is true with careless driving or worst of all a DUI. If you have some scars on your driving record then it’s especially important to compare different companies. Some companies specialize in high risk where others (like State Farm) basically price themselves out of the market.

In the end, it all comes down to taking the time to do a little research and shopping. The various online rate engines make it easy to do price comparisons for several companies in just a few minutes.