Throughout most of this wild market year, we’ve seen stocks behaving more like an on-off switch than a rheostat. It’s either been a big, suffocating bear, or a full-tilt boogie bull. The latest example of these volatile price extremes came over the past couple of weeks, as the mood in the markets was convincingly bearish on the big selling leading up to the Thanksgiving holiday. Then we saw great Black Friday and Cyber Monday sales which wet bullish appetites, and that was followed by the news of a coordinated action by the world’s biggest central banks that will essentially provide private banks easier access to dollars. That news prompted huge buying in stocks that pushed the Dow up nearly 500 points on Nov. 30.
This on-again, off-again market also has been described by many traders I’ve spoken with as a “risk on” and “risk off” market, meaning that investors read the news, technicals, company fundamentals and macroeconomic data, then decide whether it’s worth the risk, or not worth the risk. In September, the risk-off trade reigned supreme, as stocks in the S&P 500 plunged 7%. The risk-on trade ruled the roost in October, as the S&P surged 11%. November was slightly in the risk-on camp, with the S&P 500 up about 2% thanks to big buying in the final day of the month that effectively rescued the broad measure of domestic stocks from another dismal risk-off performance.
Now the question is will December see the return of a Santa Claus risk-on trade, or are we headed for a Grinch-like risk-off month?
At the risk of sounding non-committal, or worse yet, cliché, I don’t think anyone has a definitive answer given this market’s penchant for volatile price swings. Traditionally, December is a good month for stocks, and certainly the early indications—a strong start to the holiday shopping season, and the coordinated effort by global central banks to stave off a liquidity crisis in Europe—are two bullish harbingers for the remainder of the year.
Two ETFs for Risk-On Trade
If you’re a trader who wants to jump all over the risk-on trade, then there are a number of great ways to do so. Two of my favorites involve using leveraged exchange-traded funds (ETFs) such as the ProShares Ultra S&P 500 (SSO), or the ProShares Ultra Russell 2000 (UWM) .
Both of these funds are designed to deliver investment results equal to twice the daily performance of their respective indices. In the case of SSO, the underlying index is the S&P 500. So, if the index surges over 4% in one day like it did on Nov. 30, then SSO will skyrocket more than 8%. UWM is pegged to the small-cap Russell 2000 Index, which was up more than 5% on Nov. 30. That made for a spike of more than 10% in one day for UWM.
ETFs and Risk-On Trade: Caution in Order
If you are ready to roll into the risk-on trade, then both SSO and UWM are a great all-purpose way to do so. However, a note of caution here is in order. If you do buy either of these funds, then make sure you take your profits off the table when you have them. Moreover, don’t let yourself lose too much in any one position. The kiss of death for traders is being too greedy when you have profits, and being too forgiving of losses. Take your profits early, and cut your losses early. That will provide your risk-on trade with a much greater element of, well, controlled risk.