The Tycoon Report

Profit From Disaster

Thursday, November 8, 2007 | Chris Rowe

A quick invite, and then my article...

Last week, I wrote an article describing what goes on in my giant head when I'm evaluating potential stock positions.  I briefly showed how I eliminate potential trades that don't meet the criteria that I look for.  One of the potential ideas that I went over was a little company that you might have heard of - Exxon Mobil.

I told you that the stock has a major influence on the S&P 500 and Dow-30, and that it would likely weigh on the market.  Since last week's article, Exxon Mobil has dropped nearly 5%, and so has the S&P 500.  (Just yesterday, both were down about 3%.)

I told readers of The Tycoon Report that the stock looked like it was about to complete the very bearish "Head and Shoulders Top" formation, and that it would probably trade from $91.50 down to $86.00.  Because I announced the minimum price target of $86.00, and then the stock immediately completed the pattern and in three days was at $86.50, I received lots of questions from people about how I "knew" it would reach that level.  I'll gladly share that with you, no problem.

I'm going to spend a part of today looking through one of the 8 DVD'S in the CRISS system and will post the explanation for people on the CRISS "Backstage Pass" sublist. All you have to do to get onto the sublist and view the clip is visit this link>>>.

(From what I hear the sublist may be closing today or tomorrow so sign up as soon as you're finished reading the rest of this article if you're interested).

Okay, on with my Article...

My typical day lately:

The stock market opens, the Dow, S&P and NASDAQ are tanking, there is talk of inflation, recession and financial market meltdown being compared to 1990 - and I'm clapping and high fiving Dylan!  I've had a 90% accuracy rate over the last six months with an average gain per trade of 35%.

Cha-Ching!!  This is AWESOME!  I've gone to the weakest stocks in the weakest groups and recommended several put option positions (bearish positions) to members of The Trend Rider, and they are ripping higher as the market drops lower!

So today, I'm getting down on my hands and knees, and I'm begging you to do what I do and "profit from the trend".  That means that when the market is trending lower, I want you to make money from it.  Keep in mind that you don't have to be an all-out bull, or an all-out bear.  You can have both bullish and bearish positions in your portfolio at the same time. 

Remember that there are many different ways to profit from a declining market.  What I like to do is buy deep-in-the-money put options.  But if you don't like to trade options, you can buy "inverse ETFs."  ETFs are groups of stocks that are usually meant to track an index.  For instance, if you wanted your portfolio to mimic the Dow Jones Industrial Average, you would buy the ETF called the "Diamonds Trust" (Symbol: DIA).  But if you want your portfolio to show the exact opposite performance of the Dow Jones, you would buy an ETF called the "Short Dow" (Symbol: DOG).

I don't like to play the general market personally, but I like to play sectors.  They also have sector-based ETFs and "short sector" ETFs.  There are also "Ultra Short Sector" ETFs that you can trade.  For instance, I've traded the Ultra Short Real Estate ETF (Symbol: SRS).  This mimics two times the opposite return of the Dow Jones Real Estate Index.  So if the Dow Real Estate Index moves down by 10%, this ETF moves up by 20%.

For more on the types of ETFs described above, go to http://www.proshares.com/.

Another reason to use the inverse ETFs would be if you are trading a retirement account, which typically won't allow you to trade put options, or to short a stock. 

I'm not making a call on the market's direction today, next week or next year.  I'm just begging you to incorporate this into your investment lifestyle.

Now let's talk about shorting stock for a second.  Selling short is the traditional (and probably the riskiest) way to profit from a downside move.  Long story short, you sell the stock first and then buy it back later at a lower price, profiting on the difference. 

On July 6th, the "uptick rule" for selling stock short was abolished by the SEC.  The uptick rule is simple.  Before July 6th, short-selling would only occur when the last trade is at a price higher than the previous one.  This rule was designed as a market stabilizing feature.  This is because when an institution short-sells a stock, it adds selling pressure and pushes the stock lower.  Previously, if a $20.50 stock was moving lower, and I wanted to short the stock, I would have to wait until the stock moved above $20.50.

But without this rule, I can short the stock at $20.50, pushing it further down to $20.30 where anyone else can short more stock, thus pushing it further down.  Institutions can now manipulate stocks lower, because they can constantly short the same stock, pushing it lower and lower.  This is very bad for a stock market like this one, where there is a high degree of uncertainty. 

The abolishment of the rule has definitely made investors who are aware of it nervous.  The CBOE Volatility Index (Symbol: VIX) reflected that fact, as it started moving higher ever since the abolishment of the rule.  With no uptick rule, we have certainly seen a much more volatile market, so you should be prepared to see continued volatility. 










Profit from downside moves, everybody.  Don't be afraid to do it.  Don't be afraid to play both sides of the market, because the dips and jumps can happen more rapidly today. 

Stay Safe!


“Profit from the Trend”

Chris Rowe
Chief Investment Officer
The Trend Rider