As we approach the end of the year, I found myself with some discretionary investing funds. I decided to try to an experiment, based on three factors that I believe will bias the market higher over the next 45 days or so.
- Most major indices are at all-time highs (the Nasdaq being one exception, though it’s making its own headway into multiyear highs). Stocks and indices that hit all-time highs on decent volume, such as we’ve seen, often continue to make new highs. They’ll retrace here and there, but overall the bias is higher.
- Second, the market traditionally moves higher in November and December. November and April share dibs as the year’s second-best month, performance-wise; the S&P 500 has gained 1.5% on average since 1950. December is the best month, adding 1.7%.
- Third, quantitative easing continues unabated. That means money will continue to flow out of the bond market and into stocks.
So I purchased five aggressive ETFs with the intent to sell sometime in January, maybe as late as Jan. 31, and I suggest you do the same.
However — and this is a big “however” — I also set a 6% stop-loss on the entire basket. I want to make it clear that this stop loss is essential with this strategy. The volatile nature of these leveraged ETFs means there is a lot of risk, and stop-losses should always be used in these circumstances (and even when you buy other stocks).
But if you’re willing to be aggressive, take a closer look at these five trades to make before the year is out:
ProShares Ultra Financials (UYG)
Financials are in great shape with few headwinds right now, so if I’m feeling bullish, why not go as bullish as possible?
ProShares Ultra Financials (UYG) aims to for returns that correspond to twice the daily performance of the Dow Jones U.S. FinancialsSM Index, which includes large financials such as Wells Fargo (WFC) and JPMorgan (JPM), as well as credit card stocks like Visa (V) and American Express (AXP).
The fund fee is a pricey 0.95%, but that’s because it leverages returns by using swaps traded through major multinational financials.
Wilshire Micro-Cap ETF (WMCR)
Wilshire Micro-Cap ETF (WMCR) was chosen because microcaps tend to be more volatile and have higher upside than safer blue chips. However, some of the risk is mitigated by having more than 1,100 securities; the diversification protects against massive moves.
Frankly, this is the least aggressive of the five, but that’s hardly an argument against it. WMCR is clocking the market at 40% gains year-to-date,
The fund is comparatively pricey at 0.58% in fees, and its largest holding, Cardiovascular Systems (CSII) only accounts for 0.59% of the funds assets.
ProShares UltraPro QQQ (TQQQ)
Now onto the riskiest security of the lot.
ProShares UltraPro QQQ (TQQQ) invests in the Nasdaq-100 Index — a collection of the Nasdaq’s 100 largest non-financial stocks — but uses swaps and derivatives to reflect a 3x movement in the index. Ergo, theoretically three times the returns, and three times the potential losses.
Apple (AAPL) holds a 12.4% position as far as assets are concerns, with nine other well-known stocks taking up well more than a third of the assets. These include Amazon (AMZN), Google (GOOG), and Microsoft (MSFT).
The expense ratio is 0.95%, so it isn’t a cheap play, but when big tech gets goin’, TQQQ gets goin’ through the roof.
ProShares UltraPro S&P 500 (UPRO)
Of course, since my bullishness extends to the broader markets, too, I’ve bought into the ProShares UltraPro S&P 500 (UPRO).
UPRO is just a straightforward play on the upward bias of the index, leveraged to three times the daily returns of the S&P 500 through the use of swaps purchased through many of the world’s biggest financial derivatives providers.
Guggenheim S&P 500 Pure Value (RPV)
To balance out this aggressiveness just a little, I also bought Guggenheim S&P 500 Pure Value (RPV).
This was chosen to take advantage of the upward bias of the S&P in general, but with a focus on stocks that are undervalued. In theory, value stocks are already underpriced, so the downside risk is limited.
Genworth Financial (GNW) is its top holding, and it costs 0.35% in fees.
I’ll compare the returns of these securities with the indices later in December.
As of this writing, Lawrence Meyers was long UYG, TQQQ, UPRO, WMCR and RPV. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.