The Finney School of Real Life

The Shadow knows. Remember him? It seems a shadow has a firm grip on this stock market. Since the terrible break in mid-April we had a rally and then a decline. Trying to choose a suitable stock or mutual fund has been like grasping at shadows.

Two great Wall Street gurus, Elaine Garzarelli who manages multimillions of investors’ dollars and George Soros, king of the hedge funds, each have a different take on the future.

Elaine thinks the Dow Jones Industrials will be at 12,000 to 12,500 by the end of the year. Big George says we are in a bear market and must be very careful where to invest money right now. Another pundit I saw on CNBC whose name I can’t remember made a very good case for a trading range for the next several months.

Let’s examine the psychology of the majority of investors at this moment in time. Almost every one of them has been beaten with a large stick and big paper profits have been taken from their wallets. They haven’t really lost anything, but their enthusiasm for putting more money into the market has been greatly diminished. Most of the financial columnists and talking heads are saying this is a time for caution. The old “buy the break” conventional wisdom seems to have disappeared. How is this going to affect the entire market?

It takes more buyers than sellers to put the market up. That takes conviction and enthusiasm, both of which seem to be lacking. Until the little investor gets back his confidence it makes sense that this market has more chance of going sideways than of making any new contract highs.

There is so much bearish sentiment about what Mr. Greenspan is going to say next week that it may turn into a nonevent. In fact because of all this negative sentiment whatever he does may already be factored into the market. Even if it is a sharp interest rate increase the market may throw it off and move up much to everyone’s surprise. A negative event followed by a market rise is quite bullish as we saw from the unemployment number on Friday. That 3.9% unemployment number should have made the market go down, but it went the other way. We could be in for a rally this week.

I believe that if a stock or mutual fund is not going up with a strong momentum you should not buy it. Right now almost all mutual funds are going sideways. There is plenty of time to get invested so the best thing to do is wait until a definite upward trend is established and then buy it.

Since none of the great market mavens can agree then who must you rely upon? You know. You must reply upon your own judgment. Not a broker, not a banker, not an economist, not the guy on CNBC. You. Your guess is just as good as anyone else. You.

Al Thomas’ book, “If It Doesn’t Go Up, Don’t Buy
It!” has helped thousands of people make money
and keep their profits with his simple 2-step
method. Read the first chapter at
http://www.mutualfundmagic.com
and discover why he’s the man that Wall Street
does not want you to know.

1-888-345-7870; al@mutualfundstrategy.com

Even as ETFs have gone mainstream, the innovations continue. Here is a review of some new creative ETFs that have been launched or will shortly hit the market.

First Trust Advisors now has eight ETFs available to investors. The First Trust NASDAQ-100 Equal Weighted ETF (QQEWI) weights each of the 100 non-financial companies in the index equally and then rebalances on a quarterly basis. This avoids the problem in the market-cap weighted QQQQ where the ten largest companies in the index account for 40% of the total value. Another good option that does not get the attention it deserves is the Fidelity ETF, (ONEQ), which tracks the NASDAQ composite index of 3,000 companies. It too is market cap weighted but has somewhat better balance since the top ten holdings represent 29% of the basket’s value.

The First Trust IPOX-100 ETF (FPX) is a basket that includes the 100 largest, most liquid initial public offerings (”IPOs”) in the U.S. IPOX Composite Index. No one IPO can account for more that 10% of the ETF and the index it tracks measures the average performance of U.S. IPOs during the first 1,000 trading days.

Pro Fund Advisors is launching this week its first eight ETFs that allow investors to go long and short popular indexes in a cost effective manner. The ETFs will track the Nasdaq 100, the S&P 500, the Dow Jones Industrial Average (DJIA) and the S&P Midcap 400.

The ETFs that will target 200% of the value of the underlying indexes are Nasdaq 100 (QLD), S&P 500 (SSO), DJIA (DDM) and S&P Midcap 400 (MVV).

The Pro Fund ETFs that will target 100% of the inverse performance of the underlying indexes are the Nasdaq 100 (PSQ), S&P 500 (SH), DJIA (DOG) and S&P Midcap 400 (MYY). The expense ratio for these new ETFs will be 0.95%.

Rydex is launching six additional currency ETFs to build on the popular Euro ETF (FXE) as a hedge on the U.S. dollar. The currency ETFs will benchmark to the spot price versus the $USD and the strategy for each is to return the spot price, plus interest, less the trust expenses. These new products may be available to investors in about a week and will trade under the following tickers: British Pound (FXB), Canadian Dollar (FXC), Mexican Peso (FXM), Australian Dollar (FXA), Swiss Franc (FXF) and the Swedish Krona (FXS).

The largest family of ETFs, iShares, is not resting on its laurels but continues to press ahead with new ETFs. Its ten iShares Dow Jones U.S. Subsector ETFs, launched on May 1st, gives investors the ability to slice the sector markets thinly. Some examples are the Broker-Dealer iShare (IAI), the Insurance iShare (IAK), the Oil Equipment & Services iShare (IEO), the Aerospace & Defense iShare (ITA) and the Regional Banks iShare (IAT). All are market cap weighted with an expense ratio of 0.48%. The Regional Banks iShare has a decent dividend yield of 3.21%.

Some of the indexes that these new ETFs track have done quite well over the last three years through March of this year. The Oil Exploration & Production index was up 49%, the Aerospace & Defense index was up 38.3% and the Investment Services index was up 49.7%.

But if you like me prefer equal-weighted ETFs and want sector and industrial ETF exposure, State Street Global Advisors has exactly what you need with this Thursday’s launch of six new ETFs. Based on S&P Total Market Select Industry Indexes, they are
(XME) Metals & Mining, (XRE) Retail, (XPH) Pharma, (XES) Oil & Gas Equipment & Services, (XOP) Oil & Gas Exploration & Production, and (KRE) Regional Banks which is a equal-weighted basket of 50 US regional bank stocks.

iShares has also recently introduced its iPath Dow Jones-AIG Commodity Index Total Return Exchange-Traded Notes. This is a mouthful but essentially this ETF are unsecured debt securities issued by Barclays Bank PLC that are linked to the total returns of the index .

This iShares commodity ETF (DJP) has an expense fee of 0.75% and provides exposure to the following commodity groups: energy 30%, livestock 9%, precious metals 9%, industrial metals 21% and agriculture 31%. Based on monthly returns from March 1991 through March of this year, the index has had only a correlation of 9% to the S&P 500 index and 23% to the MSCI EAFE index. The index is currently is made up of the prices of 19 exchange traded futures contracts.

Chartwell members seem to be looking for more international products such as country-specifics for more emerging market countries and some fixed income international ETFs. I have been working on a equal-weighted EAFE index which an ETF could track easily. The market cap-weighted EAFE iShare (EFA) has 49% allocated to Japan and the UK and my numbers show that an equal-weighted EAFE has outperformed the market cap weighted index by a substantial margin over a three, five and ten year period.

This explosion in choice over the past few years is a blessing and a challenge. Choose carefully and get some good advice from an ETF specialist.

What do I Like About Nicholas Darvas?

Where do I start? I consider Nicolas Darvas the BEST trader, or as he him-self said “investor” in the world. I’ll admit one man’s poison is another man’s medicine. You cannot really define what is the world’s BEST trader. It’s my opinion.

Why? You must, absolutely MUST, read, re-read, study and think about every line in the book “How I Made $2 Million in the Stock Market”. I won’t lie when I say I have read it over 100 times and I still read it at least once per month. Amazingly I keep learning new points.

Darvas was actually the first CANSLIM trader without going into the finer points. This may up-set William O’Neal followers. Whilst Darvas did not actually study earnings, sectors, shares outstanding etc. his off the cuff stock selection meant he was using CANSLIM methods. Don’t forget this was way back in the late 1950’s.

He turned $25,000 into $2,25 million by scanning the newspapers in just five minutes during the late, night early morning, period. He him-self said it wasn’t so much the amount of money he made that pleased him but the ease and peace of mind it was achieved. It was SO easy. Admittedly, he was lucky in that he traded his system during a roaring bull market. But his system makes money in all market conditions. It’s just a fact that you’ll make a lot more during a run-away bull market. That can be said for most systems.

The perfect attitude for trading. When he was wrong on a trade he shrugged his shoulders, cut his losses and looked for the next one. No second guessing. No emotion. No ego involved. He told the reporter who interviewed him for a time magazine article he only expected to be correct half the time.

Without doubt his best quality was his ability to question everything. When he was wrong why? What worked and why? What didn’t work in the stock market and why? Question everything and eliminate what doesn’t work. He pieced together a system that fitted his personality. The person who can do this will be a big winner in the markets.

Flaws:

What flaws can the world’s best trader have? Actually there is one and it was a very dangerous one.

Money management. Boy was he lucky! Buying a 100% position on leverage on one stock could have been the death of his account. When he bought 2,500 shares, on margin, of E.L Bruce (a small cap un-known stock) IF things had have turned ugly here, i.e. prices gapped down or fell off very sharply, no doubt Darvas would have been finished. Instead of writing a book about how he made his fortune in the Stock Market he might have written one about how a fortune was lost. Luckily he made over $300,000 from this transaction alone. Had he have had some money management rules in place, sure the gains would not have been as big, but at least IF things hadn’t have worked out he could live to fight another day.

A number of occasions Darvas “plunged” into the market with little thought to money management and risk. Ignorance really was bliss. Jesse Livermore was not quite so lucky.

Conclusion:

A shining light of hope to the man on the street that anyone given time, education, desire and determination can make BIG money in the stock market. You don’t have to have state of the art technology, data, or in-side information to make massive returns.

If Darvas can make $2,25 million by scanning the papers for five minutes before bed what does that say for today’s Hi-tech trading techniques?

His methods still work and always will work. If it stops so will the stock market.

* * * * 1/2 41/2 Star Trader (P.S. there will never be a 5 star trader)

Mark Crisp
The Stress Free Momentum Stock Trader
http://www.stressfreetrading.com

A trailing stop loss is very similar to a stop loss, but where the one kept your losses small, the trailing stop loss will enable your profit growth.

A trailing stop loss is calculated in a manner like the way we calculated our initial stop loss. The only difference being that while we calculated our stop loss from the entry price, we`re calculating our trailing stop loss from the highest price since entry. The key to the trailing stop loss is that you need to make continual adjustments to make sure that the stop is moved in your favour.

The method that you use to set your trailing stop loss can vary dramatically. However, if we use the ATR method that we used to calculate our initial stop to set our trailing stop loss, we`ll have the ability to lock in the profit as the share price increases.

For example, if you bought a share at one dollar, and your initial stop was set at 90 cents, your trailing stop would also have a value of 90 cents. If, after the first day, the share price moves in your favour and moves to $1.10, you would recalculate your trailing stop loss by subtracting two times the value of the ATR from the new high price of $1.10. For simplicity, let`s assume that your stop size hasn`t changed, and is still ten cents wide. When you calculate your new trailing stop loss, by subtracting the 10 cents from $1.10, it would be set at one dollar.

At this point, your initial stop was at 90 cents, and your trailing stop loss is now at a dollar, with the share price is at $1.10. Since your trailing stop loss is higher than your initial stop, the initial stop becomes obsolete, and our trailing stop loss becomes your active exit.

Now, my question is, How much profit have you made on this trade?” The share price is at $1.10 and we entered at one dollar. If you thought, No, I haven`t made any money”, then you`d be right on track. Remember, our stop loss strategy gives the share price a little bit of room to move.

You`re not going to exit this position until the share price reverts to one dollar. It`s important to note that when you are valuing any open position, you should always value it based on its stop loss value, since if you were to exit this share, you would wait until that price point was breached.

Let`s go back to the example. Now, what happens if the share price begins to fall? Let`s say that the share price falls from $1.10 down to $1.05. What does your trailing stop loss do? Would it move down also? Here`s another important point. A stop loss will never, ever move down. A trailing stop loss can only move up. This ensures you lock in profit and that you`ll also get out of the shares once they start to turn. A trailing stop loss is always calculated from the highest price since entry, so the highest price is still $1.10.

It`s not until the share price makes a new high since entry that the trailing stop loss would begin to move in your favor again. However, if you`re using the ATR method, there`s another way for our trailing stop to move up. This would occur when the volatility of a stock begins to decrease. If a share price were to begin to move sideways, the ATR value would start to drop off. This would cause the trailing stop to move up as the share price became less volatile.

The best way to understand these concepts is to print out a chart with the ATR values along the bottom. Then on the chart, identify the point where you would have received an entry signal, and mark your initial stop loss and your trailing stop loss.

As the trend progresses make sure that you recalculate the value of your stop so you can begin to get a feel for the way this method of using a stop loss works Seeing how the changes in stock price affect you trailing stop loss will give you the confidence to make them a key part of your trading system.

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