The Tycoon Report

Another Profitable Idea!

Tuesday, June 24, 2008 | Chris Rowe

In this day and age, if you want to profit from the stock market you have to completely forget about the idea of just buying and holding "the market".  Popular ways to do this are purchasing ETFs that mimic the stock market such as "DIAMONDS Trust" (Symbol: DIA) which mimics the Dow-30, the "PowerShares QQQ" (Symbol: QQQQ) which mimics the NASDAQ 100 or "SPDRs (Symbol: SPY) which mimics the S&P500.  Frankly that's the worst game in town.

In the last 10 years the market (S&P 500) showed an annualized return of about 2.5%!  Since I launched my trading service "The Trend Rider" in September 2005, the S&P has returned a measly annualized 2.05%.  That's only 6.2% in TOTAL... and that number may decline yet.

You absolutely must get creative if you want to make money in the stock market, and getting creative doesn't mean you have to be incredibly sophisticated, nor does it mean you have to work any harder. 

I'm going to add a few links in today's article to some of my old articles, and by using those old articles,  I'll give you a strategy to profit from over the next couple of weeks.

Even if you don't try it, you should educate yourself by reading them.

To skip to the article, just scroll down.  But first I want to thank you for all the e-mail you've been sending me lately.  Recent articles seem to have made some money for a bunch of people with S&P puts and taking bearish positions on the Wall Street Sector.  I intend to give you some more goodies within reason (because I have to save the gems for members of The Trend Rider).

My favorite - and by far the most motivating - e-mail I received was the following:

Dear Chris,

I've been reading your articles for 2 years (and I just turned 17 years old) and you've helped me make my dad over $110,000.00.  I seriously spend all my time reading about the market.  Because of your recent article about hedging with S&P500 put options and since you've been talking about bearish positions on Wall Street stocks, we profited even though my dad's friends are talking about how awful the stock market has been. 

Thanks!

Jed

Hey Jed, you are THE MAN!  17 years old huh?  Makes me feel that much better about future generations.

He's talking about last week's article "This Falling Dagger Can Bleed Your Portfolio" and my May 27th article "Why This Week Could Pulverize Your Portfolio!".


TODAY'S ARTICLE CONTINUED...

To be clear, I'm not saying that the buy and hold approach is bad -- when you are in the right sector and/or stock/ETF.  I'm saying it's a horrible strategy to try to mimic what the general stock market does.  I told you the S&P 500 returned 2.5% annually over the last 10 years (that's when you reinvest your dividends, mind you).  But chances are you didn't even make that return.

Consider this:

From 1984 – 2003 the S&P 500 realized annualized returns of just over 12%.  On a rate of return of 12%/year, compounded annually, it would take you about six years to double your money. 
 
But studies show that the average equity fund investor only realized less than 3% return in that same time period!  On a rate of return of 3%/year, compounded annually, it would take you about 23.5 years to double your money.  
 
I've bummed you out enough here.  What are we going to do about it?

I PROMISE YOU - If you read The Tycoon Report daily, you'll get good ideas and you'll acquire the framework you need to make you own decisions.  But for today, I'll point your attention to two articles and a hedging strategy that you can use right now.

In short, you can use the "Pairs Trading" strategy I recently talked about and you can get bearish on the NYSE and bullish on the NASDAQ 100 simultaneously.  This may or may not make sense for you because it may only yield you a couple of percentage points.  But a couple of percentage points in a couple of weeks is 52% annualized. 

Maybe you can use some leverage over the next couple of weeks because it's a short-term trade.  If you trade on margin you only have to commit 50% of the value of the combined trades, and in this case you aren't taking the kind of risk one takes when they use margin (twice the potential profit with twice the potential loss), because you are hedging two indices that are very closely related. 

The risk is exceptionally low assuming you are in and out of both at the same time.  You can feel comfortable taking a much larger sized position than you usually take because, again, it's a hedged position.

The two articles you might want to review for details on how to do this are:

- "Profit Like a Hedge Fund From This Article" (click to read)

- "Trading Secret: 12-day sweet spot coming in 6 Days!" (click to read)

Don't let the title fool you.  The sweet spot starts June 26th this year - that's Thursday.  (More importantly - it ends July 11th).  When I wrote the article a year ago, the sweet spot was 6 days away.  Last year, a pairs strategy applied to this phenomenon would have returned you 1.3%.  Since this is a hedged strategy, one can feel comfortable putting an abnormally large amount of money behind it. 

But remember: Be sure to exit the strategy on July 11th.  July is typically a bad month for the NASDAQ. 

The idea is you can take a bearish position on the NYSE by selling-short "iShares NYSE Composite Index" (Symbol: NYC) which tracks the performance of the NYSE Composite, and a bullish position in "Powershares QQQ" (Symbol QQQQ) which tracks the performance of the NASDAQ 100. 

Each position should be taken using the same dollar amount on each side, and utilizing margin.  Whether the market trades up or down, as long as the NASDAQ outperforms the NYSE (trades up by more, or trades down by less) you will be profitable. 


SPECIAL NOTE 1:

While this specific strategy only talks about a seasonal trend (this time of year, the NASDAQ tends to outperform the NYSE) the fact is that this can be successfully used whenever the NASDAQ is outperforming the NYSE.

If you put this pairs trade on (short NYC/long QQQQ) since the March low, this strategy would have returned you 6.2% with minimal risk.  (NYC is up 7.8% and QQQQ is up 14.42%.  Profitable on QQQQ by 14.42, unprofitable on NYC by 7.8%.)

If you put this pairs trade on at the recent market high on May 19th, you would be up 2.05% (even though NYC is down 7.75% and QQQQ is down 5.7%).

These returns may seem low to some, but given the very low risk involved, it's a great reward/risk ratio.


SPECIAL NOTE 2:

If you want to play this seasonal trend without hedging, you can just buy the QQQQ, or if you want to be more aggressive, the QLD which returns 2x the performance of the QQQQ.


SPECIAL NOTE 3:

Short Interest at the NYSE is at an all time high.  That means more bearish bets THAN EVER BEFORE are being taken on the NYSE.  Most people consider this a contrary indicator because the shares are already short.  That means, investors already sold the shares with the intent on buying them back cheaper.  So the selling pressure has already been applied.  The next move, of course, will be to buy the shares back. 

This repurchasing of the stocks that were sold short tends to cause a "short-squeeze".  That means the repurchasing of a record number of shares would push the market higher.

BUT - People tend to get intrigued by record short interest.  You'll read articles about the anticipated short squeeze.  Many buy into that news hoping for a big rally.

SPECIAL NOTE 4:

Just have to repeat myself here: Be sure to exit the strategy by July 11.


SPECIAL NOTE 5:

Enjoy your week!  Don't forget to check out my weekly market summaries each Monday in the "Videos" section of www.thetycoonreport.com


“Profit from the Trend”

Chris Rowe
Chief Investment Officer
The Trend Rider