Betting on a Bounce

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
Last week was one of the most remarkable weeks in U.S. stock market history.
 
It wasn’t just that the U.S. debt was downgraded by Standard & Poor’s for the first time ever since 1917, when Moody’s started the whole sovereign rating game.
 
Nor was it because of an unprecedented market crash. In fact, by the time last week’s gyrations ended, the S&P 500 ended the week down only 1.63%.
 
But here are some of the many astonishing statistics about last week’s trading.
 
With 67 stocks down for every stock up on the NYSE, last Monday’s devilish drop of 6.66% was the market’s worst performance since the German tanks rolled into France in May of 1940. By the same measure of advancing stocks versus decliners, the following day was the market’s best-ever performance.
 
Last week was only the sixth time since 1897 that the S&P 500 swung at least 4% up or down for four straight days.
 
Finally, the University of Michigan Consumer Sentiment on Friday recorded its third-lowest reading since the survey started in 1952. U.S. consumers haven’t been this blue since the days of Jimmy Carter.
 
Now, one of the many first rules of trading is to step away when volatility is high… But I’m going to suggest that you ignore that bit of wisdom and step back into the market.
 
And here’s why…
 
Most price- and breadth-based indicators were stretched to negative extremes that have been seen only a handful of times in the past 50 years. And that usually means that things have to “revert to the mean” by moving back to “normal” levels. It’s also bullish that corporate insiders greatly picked up their pace of buying last week, particularly in small-cap stocks.
 
Odds are that when you look back in three months, this week will turn out to be the buying opportunity of the year.
 
That’s why this week’s Bull Market Alert recommendation is to buy ProShares Ultra S&P500 (SSO). This ETF replicates twice the daily price performance of the S&P 500 Index.
 
If markets bounce back to previous levels of around 1,350 by the end of the year, there is about a 15% upside in the S&P 500. That same move translates to about 30% upside with this 2x leveraged position.
 
Given the high level of risk still in the market — and that I may be wrong in my belief that the market hit its low for the week of 1,120 — I recommend that you place a relatively tight stop on this position at $34.00.
 
With volatility so high, the SSO options are overpriced. So, I won’t be recommending options on this position until the volatility in the market settles.
 
Full disclosure: I took a personal position in SSO after last Monday’s sharp drop.

Portfolio Update

ProShares Ultra Silver ETF (AGQ) rose 3.93% last week. Estimates peg the historical total of mined gold at five billion ounces, with two billion ounces currently available as purchasable physical gold. Yet for silver, the total mined estimate is 46 billion ounces, with one billion ounces existing as purchasable physical silver. Based on that simple measure, silver outshines even gold. AGQ remains a BUY as it battles to hold the 50-day moving average.
 
Alliance Resource Partners L.P. (ARLP) gained 2.24% this past week. Although the price of oil has taken a recent tumble, coal remains a cheaper alternative. As a large component in many nations’ power-generation and steel-production energy needs, demand for coal is set to remain strong. ARLP is still below its 50-day moving average and remains a HOLD.
 
Bank of Ireland (IRE) came in flat last week with a 0.81% loss. This is quite an accomplishment given the rising uncertainty surrounding European banks. IRE reported earnings on Aug. 11 and announced a hike in several charges such as interest rates on mortgages, credit cards and personal loans. IRE also announced the sale of a $1.4 billion loan portfolio to Wells Fargo. These moves should help IRE with future profitability, as well as raising capital for future investment. IRE remains a BUY.
 
National Bank of Greece SA (NBG) lost 6.90% over the past five days. Greece has managed to duck the debt-crisis spotlight in recent weeks. Attention now seems focused on larger European nations such as Italy and Spain. With pressure mounting on all European banking sectors, NBG is feeling the heat as well. NBG is a HOLD.
 
Toyota Motor Corp. (TM) fell 3.91% last week. Blame this on massive volatility and negativity on Wall Street. But good news is on the horizon as consensus among automakers, dealers, and industry analysts shows a second-quarter 2011 recovery in auto sales. TM is a HOLD.
 

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