Today, I will analyze the first-half performance of the three major indexes, then identify ways to play both bull and bear moves using low-expense, Exchange Traded Funds.
Why ETFs and not mutual funds? Very simply, readers ask about ETFs more than the more expensive mutual funds these days.
To say the first half of 2020 was exciting is an understatement. In the first quarter, we saw panic selling, dropping some indexes 35%. After the market bottomed on March 23, we experienced a very strong rebound.
To see how each index performed, I designed a chart going back one year to see the performance during panic selling, and the spectacular market rebound. The three major indexes are as follows: NASDAQ Composite (red line), S&P 500 (green line) and the Dow Jones Industrials (purple line).
The performance from Jan. 1 to June 30: the NASDAQ Composite 12.11%, S&P 500 -4.04%, and the laggard is the Dow Industrials at -9.55%.
Here are the key points: When panic selling hit in February, it affected all three major indexes. When the selling stopped and buying came in, the NASDAQ (red line) rebounded the most while the Dow Industrials (purple line) rebounded the least. Keep this front and center the next time panic selling hits.
While some think the markets will continue to rally, others are looking for a nice pullback. To answer your question on which funds I play, here are my main non-leveraged bull and bear, Exchange Traded Funds, for all three indexes:
QQQ-Invesco QQQ Trust seeks investment results that generally correspond to the price and yield performance of the NASDAQ 100 Index.
PSQ-ProShares Short QQQ seeks daily investment results before fees and expenses that correspond to the inverse (-1x) of the daily performance of the NASDAQ-100 Index.
SPY-SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.
SH-ProShares Short S&P 500 seeks daily investment results that correspond to the inverse (-1x) of the daily performance of the S&P 500 Index.
DIA-SPDR Dow Jones Industrial Average seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average.
DOG-ProShares Short Dow 30 seeks daily investment results, before fees and expenses, that correspond to the inverse (-1x) of the daily performance of the Dow Jones Industrial Average.
So, here's the next question: How do I trade the major indexes? To answer this question, I designed another chart, using the same indexes and timeline but added the 30-day, simple moving average (blue line).
Here are the action points: Note what happens to the indexes when the price drops down (green oval) or up (blue oval) through the 30-day, simple moving average. To keep from wasting time, having to watch this throughout each day, I set an alert with my online broker, to let me know when it happens. When I receive an alert, I go to one of the mentioned Exchange Traded Funds and use my Simple Simon system, to let me know when it is time to buy, and then sell. See previous columns for details.
If an official buy or sell signal develops, I then buy incrementally, meaning not all allocated shares at once. For example, if I plan to allocate for a full position, no more than five percent of my portfolio value. If this is 40 shares, then I would only buy 20 shares if the price continues to go up, then and only then would I buy the second half of 20 shares.
Once purchased, I place protective stops in case the security reverses. If the security continues to go and hits my target price, I lock in my profit on half of my shares and trail the other half with a protective sell stop so I still have skin in the game if the price continues to go up. Never limit your upside. Only limit the downside — the amount you can lose.
Remember, when buying one of the bear ETFs, you are not shorting the security, you are going long. The security does the shorting for you. Why is this important? Because when shorting, the amount you can lose is infinite. When going long, the most you can lose is the purchase amount.
The main problem: Many traders and investors make things difficult. Keep things simple. If you follow these instructions, using alerts then only buy when your system gives you official signals, you will start to see more dark green, instead of red in your bottom line.
Coming up, I plan to analyze the market cap then sector performance for 2020, for momentum and value plays-what readers are asking for. Don’t miss it.
Plan your work, work your plan, and share your harvest!
DAVID O. ENGLAND is an investor/trader, financial analyst/educator/lecturer and Associate Professor Emeritus of Finance. This column is for educational purposes only and not intended as financial advice. Past performance does not dictate future returns. Questions? Send to email@example.com. Full Disclosure: The author does not own any securities in this column.