General Notes on Investing with ETF’s

All the models I use generate buy signals and sell signals. A sell signal on the SP500 means simply that the model expects the price of the SP500 to drop. A buy signal expects the price of the SP500 to rise. If one has a general brokerage account, when a sell signal is given, one can sell shares of the SPY, the ETF that tracks with the SP500. To sell shares that you do not own, you will need a margin account. So one would sell shares of the SPY, then the SP500 and the SPY would go down, hopefully, and one would buy your shares at a lower level, a few or several days later. Sell high, then buy low… one makes money that way.

Federal laws, I believe… but I am not a tax lawyer, do not allow margin for any retirement account (IRA or 401K). So what do you do if a sell signal is given by one of the models? The answer is: use inverse funds or inverse ETF’s. Inverse ETF’s track inversely (that is, in the opposite direction) to the underlying entity. The SPY mentioned above tracks with the SP500. If the SP500 goes up 1%, the SPY goes up 1% (about). If the SP500 goes down 1.2%, the SPY goes down 1.2% (about)… so it tracks (or mimics) the SP500.

The ETF with the symbol SH tracks inversely with SP500. If the SP500 goes up 1%, the SH goes down 1% (about). If the SP500 goes down 1.2%, the SH goes up 1.2% (about)… so it tracks inverse (or opposite) to the SP500.

So if you have an account that does not have margin, like an IRA or 401K, when the SP500 gives a sell signal, then you could buy shares of SH. What would happen? Hopefully, the SP500 would go down, as the model was predicting, and the SH (because it is an inverse ETF) would do the opposite to the SP500… the SH would go up. You buy the SH low, then sell the SH high… one makes money that way. You made money while the SP500 was dropping.

Leverage

There are ETF’s that are leveraged, for both the SP500 index (SPX) and the Nasdaq 100 index (NDX). For example, the SSO tracks with the SP500, but with 2x leverage. If the SP500 goes up 1%, the SSO goes up 2% (about). If the SP500 goes down 1.2%, the SSO goes down 2.4% (about)… so it tracks (or mimics) the SP500 with 2x leverage.

The ETF with the symbol SDS tracks 2x inversely the SP500. If the SP500 goes up 1%, the SDS goes down 2% (about). If the SP500 goes down 1.2%, the SDS goes up 2.4% (about)… so it tracks 2x inverse (or opposite) to the SP500.

There are ETF’s that are leveraged 3x for the SP500 index (SPX). For example, the UPRO tracks with the SP500, but with 3x leverage. If the SP500 goes up 1%, the UPRO goes up 3% (about). If the SP500 goes down 1.2%, the UPRO goes down 3.6% (about)… so it tracks (or mimics) the SP500 with 3x leverage.

The ETF with the symbol SPXU tracks 3x inversely the SP500. If the SP500 goes up 1%, the SPXU goes down 3% (about). If the SP500 goes down 1.2%, the SPXU goes up 3.6% (about)… so it tracks 3x inverse (or opposite) to the SP500.

For the Nasdaq 100 index (NDX)…

The QQQQ ETF tracks with the NDX. If the NDX goes up 1%, the QQQQ goes up 1% (about). If the NDX goes down 1.2%, the QQQQ goes down 1.2% (about)… so it tracks (or mimics) the NDX.

The ETF with the symbol PSQ tracks inversely with NDX. If the NDX goes up 1%, the PSQ goes down 1% (about). If the NDX goes down 1.2%, the PSQ goes up 1.2% (about)… so it tracks inverse (or opposite) to the NDX.

The QLD tracks with the NDX, but with 2x leverage. If the NDX goes up 1%, the QLD goes up 2% (about). If the NDX goes down 1.2%, the QLD goes down 2.4% (about)… so it tracks (or mimics) the NDX with 2x leverage.

The ETF with the symbol QID tracks 2x inversely the NDX. If the NDX goes up 1%, the QID goes down 2% (about). If the NDX goes down 1.2%, the QID goes up 2.4% (about)… so it tracks 2x inverse (or opposite) to the NDX.

I am looking for ETF’s that are leveraged 3x the NDX. There is a small cap ETF that I have used in place of the NDX when looking for 3x leverage, with the NDX 3-4 Day Model signals. The TNA tracks with 3x leverage the small cap stocks and is used for buy signals. The TZA tracks 3x inverse the small cap stocks and is used for sell signals with the NDX 3-4 Day Model.

Something should be obvious, using leverage increases the risk to your portfolio.