Not for the Faint of Heart


No one liked my last post on “Options and Brackets” … so let’s try this one out.  I call this investment scheme “Not for the Faint at Heart” because it is one of those that could give you a heart attack if you let it.  If not a heart attack … at least heart burn.  But, when it works right … you will be quite pleased.

This one is going to take a few minutes each day setting at your computer.  It will involve two ETFs and a market index known as the NASDAQ Composite.  Let me say here that it can also be done using the S&P 500, the Dow Jones Industrial Average, or just about any other index there is, and that indexes corresponding leveraged and inverse ETFs.

An ETF is an Exchange Traded Fund.  It is a mutual fund that is traded like a common stock (in other words … during market hours).  Most Index ETFs are quite safe since they simply follow the index.  However, ETF Manufacturers (as I like to call them) have come up with some different varieties of these funds.  For example … you can buy one that will go opposite of the index.  If you think the index (DJI, SPX or NASDAQ) is going to go down you may purchase an inverse fund and as that index goes down your fund values go up and you make money.

There are also ETFs (regular and inverse) that will outperform the index you are tracking by 2 or 3 times.  Using the 3 times approach, this means if the Dow Jones Industrial Average Index (DJI) goes up say 1% today … the Proshares Ultra Dow ETF (UDOW) will go up 3%.  However, if the Dow were to fall 1% today then your fund would likely lose 3%.  If you thought at the outset the Dow would fall by 1% you would likely want to invest in the Proshares Ultra Short Dow ETF which would go up 3% if the Dow goes down 1%.  However, if the Dow turned around and went up 1% then the fund you hold would come down by 3%.  These ETFs are known as leveraged ETFs and use margin and options and other variations of derivatives to improve the returns to 300% of the index return (up or down).

I could spend a year or more teaching about ETFs.  Some of this you simply have to do the research and learn on your own.  What I will tell you is this.  A regular ETF – one that follows the index 1:1 is a good “buy and hold” investment.  Any other ETF (short and leveraged)  should be considered a “day trading” tool and one that should be used solely for that purpose or to hedge a portfolio.  At a future date I will discuss how to hedge a portfolio with an inverse ETF … but for now let’s talk about this Not for the Faint of Heart Investment Strategy.

Why the NASDAQ Index?

As you know the Dow Jones Industrial Average (DJI) index is made up of 30 stocks.  The S&P 500 is an index made up 500 stocks.  The NASDAQ Composite Index (COMPX) is made up of over 3,300 stocks currently.

Below is a graph of the NASDAQ Composite Index from the open on July 1, 2019 through the close today August 1, 2019:

Faint of Heart 1
Figure 1

Now I have to be the first to admit that the graph does not look very good.  This graph used 60 minute bars for each trading day … so if you count them you will find each day holds seven bars.  Had you bought into this index on July 1 and held till today … you would have lost money.  Had you bough it on July 1 a the open and sold out on Jul 29th at the high … you would have made a return of about 2.27% on your money.

What if, with a little work, there was a way to make even more than that … even if you held it till today?  There is a way.

The two ETFs used …

The first ETF I want to draw your attention to has the stock symbol of TQQQ.  This is the Proshares ultra NASDAQ Index Fund.  It tracks the movement of the index by 300%.

The second ETF is the one with a  stock symbol of SQQQ.  This is the Proshares ultra short NASDAQ Index Fund.  It tracks the inverse movement of the index by 300%.

Trades made and Timing of trades made …

Faint of heart 2
Figure 2

You will notice there are 23 trading days represented here.  What I did in this plan was to purchase my ETF on the trade date at 10:30 in the morning (Eastern Time) based on the direction the market was moving at 10:30 AM.

I’m not saying you should never buy at the open … but during the first one hour the market is open there is a lot of things that can cause the market to jump up or down quite quickly.  Usually, not always, by 10:30 or so the market has a general idea of the direction it is headed for the day, unless someone in Washington DC sneezes later in the day, of course.

The other thing I did in the plan in addition to purchasing at 10:30 AM was to sell out (regardless of price or gain and loss) at 3:50 PM Eastern Time (about 10 minutes before the market closes).

If the market was headed down at 10:30 AM I purchased SQQQ … the ETF that would go up in value as the market dropped.  By market here I mean the NASDAQ Index.  It is possible for the NASDAQ to go down while the S&P 500 and the Dow go up.  It is also possible for the opposite to happen.  Not all indices rise and fall together.  If the market/index was headed up at 10:30 AM then I would buy the TQQQ fund and attempt to end up with 3 times whatever the market returned (or 300% of the index return).

It is important that you sell these on the close of business the day that you buy them.  Why would you want to do that?  Because the ETFs’ leverage is reset daily and the close of the market.  Investing in them alone is risky … by holding them longer than a day you really add to the risk.  You can read more about the risk and why it is usually best to stay away from these investments until you really do understand them in this US News and World Report article from April 2018.  As a financial advisor for 42 years we were never allowed to recommend these to clients because they needed to be day traded and financial advisors/consultants simply do not have enough time to do that for multiple clients.

So, I buy either the SQQQ or TQQQ at 10:30 AM and sell it at 3:50 PM.  Between 10:31 and about 3:00 I either play golf, ride my motorcycle, play my guitar or argue with my wife about the “Honey Do” list.

How does it all work out?

Starting with $15,000 on July 1, 2019 and trading in an account that currently is commission free this is what has occurred through July 31, 2019:

Faint of Heart 3
Figure 3

Now you have to admit … that is not a bad equity line going from $15,000 to $19,711.01 in a period of 23 trading days.  That is Return on Investment of 31.41%.

What did the NASDAQ do during this period?  Look at Figure 4 below.

Faint of Heart 4
Figure 4

You would have seen an increase of about 1.70% over that period of time with all the ups and downs (from 8145.85 to 8274.85).  With a little work and perhaps some heart palpitations … doesn’t 31% sound a little bit better?

Sometimes it just does not work.

If I break down the graph in Figure 1 to show today only … this is what we see with the NASDAQ Composite:

Faint of Heart 5
Figure 5

That second green bar from the left is what I saw at 10:30 AM this morning so jumping on the bandwagon (remember I could not see beyond 10:30 because I don’t have a crystal ball) I purchased the TQQQ.

Starting at about 11:30 … all hell broke lose in the market.  President Trump announced another 10% tax on Chinese goods (in other words someone in Washington DC sneezed) and everybody got antsy and started selling again – just like yesterday – but yesterday I was in the Inverse fund and today I was not.

That being said …

I’m still ahead of the game.  Take a look after selling the ETF at 3:50 today:

Faint of Heart 6

Even though I lost 5.44% today … I’m still up 24.26% in 23 trading days.  Can’t wait to see what happens tomorrow.

Earlier I told you that you should not hold these funds overnight.  But, if you revisit figure 2 with 3 to 4 up days in a row and 3 to 4 down days in a row … you may question the logic.  Don’t question the logic … question the facts.  I told you they reset the investments that provide the leverage everyday.

Let’s assume that I would have followed the investment principle of buying the SQQQ on day 1 and decided to hold it to see what Day 2 would dictate at 10:30 AM.  Well it dictated that I get out of SQQQ and buy TQQQ.  Then I was in TQQQ for 3 days before going back to SQQQ for a day.

Bottom line:  If I would have held the investments until I was told to sell them by the system I set up and did this through today (meaning I would have held TQQQ for 3 days straight 4 different times and SQQQ for 4 days 1 time … this is what the investment would look like today —

Faint of Heart 7
Figure 7

Now that is not a very pretty investment graph.  Notice this was down 9.24% today … that is because I would have still held TQQQ waiting to see if I should hold it or sell it tomorrow and it dropped that much more in the last 10 minutes.  Overall, a 3% gain  (almost) in 23 days is not something to get excited about and I would have had to work to hard for this little bit of money — $449.15 total.  Social Security pays better.

Moral of this story …

If you are going to day trade … use the right tools … have a plan … and follow the plan.  If you don’t want to take the time to do that then invest for the long-term and enjoy life.

I hope this helps some of you … but if it does not, please remember, it did not cost you a dime to read it.

Have a great time investing and let me know if you’d like me to cover some other investment topics that may be of interest to you.

Thanks,

Jerry Nix, Freewavemaker, LLC

Disclaimer:

This information is not recommendations for you to purchase or sell any investments outlined in this article. The information is being shared for educational purposes only. I recommend that you seek the advice of a licensed and competent financial advisor before taking actions on your portfolio if you see a need to after reading this article.

The author of this article is long on the following investments outlined herein:  Currently neither TQQQ or SQQQ but will be purchasing one of them tomorrow morning.

 

 

 

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