Play the Rally With Leveraged ETFs

by Anthony Mirhaydari | June 23, 2011 4:12 am

Stocks have been pushing higher over the last few days as investors continue to react positively to signs of progress out of Europe and Greece. There has also been stabilization in economic expectations, with the Citigroup Economic Surprise Index leveling off after its worst drop since the financial crisis.  (You can see a chart of the CESI here[1].)

A vote of confidence in the Greek government passed after Tuesday’s market close. The Greeks must now approve austerity measures and the euro zone finance minsters and the International Monetary Fund must provide the next tranche of bailout money. Then there is the matter of securing private investor participation in any “Bailout 2.0” structure. That will be the subject of much speculation as the discussions pick up steam in July.

So look for a temporary reprieve from the Greek tragedy as people react to the short-term injection of rescue money. But the long-term financing to get the country through 2012 has yet to be secured. That’s the next big hurdle. Thankfully, for now it’s a concern for another day.

Right now, the market is still oversold and due for a rebound rally. And we’ve got a strong one underway. On Tuesday, the quantitative timing model I developed for the benefit of my newsletter subscribers[2] threw its first buy signal since April. The buy signal was also quite strong in what was the best reading seen since December 1.

This is a great sign that the bulls are gaining upward momentum as breadth widens. Indeed, nearly 90% of the 30 stocks in the Dow Jones Industrial Average are now above their nine-day moving averages; a huge improvement from the 0% seen as recently as June 10.

And on Tuesday there were 2,167 net advancing issues on the NYSE, the best result since way back on September 1. That day marked the beginning of the post-QE2 uptrend which was fueled initially by speculation the Fed would engage in another round of direct long-term bond purchases after it was teased by Fed Chairman Ben Bernanke at a speech in Wyoming in late August.

So far, so good. After a long drought, we’re back on the right track. Many of the important cyclical sector groups that have been on their heels lately — including technology, semiconductors, and energy — perked up in a big way. The rally has legs, baby. Big strong ones.

As a result, I recommend investors focus on smaller, riskier stocks as risk appetites return. The Russell 2000 is rallying out of its deepest oversold condition seen since last September. I’ve recommended my newsletter subscribers take advantage with the leveraged Direxion Daily Small Cap Bull 3x Shares (NYSE: TNA[3]). Investors looking for less risk would do well with the iShares Russell 2000 (NYSE: IWM[4]).

At the sector level, financial stocks still look very strong and are in the vanguard for the first time since December. Again, I’ve recommended leveraged exposure to the move with the Direxion Daily Financial Bull 3x Shares (NYSE: FAS[5]). The non-leveraged alternative is the Financials SPDR (NYSE: XLF[6]). I discussed bank stocks at length in my last post here[7].

Disclosure: Anthony has recommended TNA and FAS to his newsletter subscribers.

Be sure to check out Anthony’s new investment advisory service, The Edge. A two-week free trial has been extended to Investorplace readers. Click the link above to sign up.

The author can be contacted at anthony@edgeletter.com[8]. Feel free to comment below.

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