4 ETFs for Quick Gains

09/05/2011 7:00 am EST

Focus: ETFS

Lewis McLain is currently using 2X and 3X ETFs to grab profits in fast-moving markets. He cautions, however, that his strategy is not necessarily appropriate for all investors or traders.

Kate Stalter: Today, we are speaking with Lewis McLain, a financial consultant, a former fund manager, and a trader. Thanks very much for joining us today. What is your take on the current market environment?

Obviously, we’ve had a lot of volatility in recent weeks. What do you believe is important for individual investors to be aware of right now?

Lewis McLain: Well, to me the volatility has been in place really for the last couple of years. If you just started with the "flash crash" of 2010 and look forward, I can’t imagine there could be more significant world events, as well as economic quotes and news that are causing what appears to be an ongoing volatility. I’m not sure it’s going to end any time soon.

Kate Stalter: Given all of that, what do individuals need to be watching out for in this environment?

Lewis McLain: Well, to me it’s watching out for news that pumps the market up artificially, if you will.

From my perspective, I am a bear. After spending a lot of time looking at the actual data coming from the federal government, I actually wrote on the subject in 2007 after watching Bernanke on TV, and watching how his face was saying one thing and his words were saying another. He was being grilled by a congressional committee.

Since that time, I really have been convinced that the market has been propped up artificially for a long, long time. QE1, QE2, those are just part of what I think has been a boost that just doesn’t last very long. The fundamental structure of our economy and the overindulgence of the last 20 years has led to artificial gains in the market.

So, therefore, what I do is look at the data for myself. I actually read a lot. I listen to a lot, but I think the argument for a bear market, caused by weaknesses in our economy, is what motivates me. So, my caution is for anything that continues to artificially prop up the market that I don’t believe is for real or long-lasting.

Kate Stalter: Now you were telling me previously about your current strategy. Give us some idea of what you’re doing right now in your portfolio.

Lewis McLain: Well, I have done a lot of day trading since 2004, but then went into a more diversified portfolio. But the last few months, actually for the last year, I have really gone to a day-trading strategy that allows me, for the most part, to be in and out of the market on the same day.

I do stay in overnight. I don’t like to stay in over a weekend. There is just too much potential for news that has been held up and is going to be revealed over a weekend.

I am prone to actually trade in the ETFs that are 2X or 3X, that move pretty rapidly. It wouldn’t work for everyone, but I trade with my own platform that allows me to execute trades and execute them quickly, so I’m perfectly happy with making a decent daily profit.

If I can reach that in an hour or two—and some days if I can actually reach that before the market even opens, and that happens fairly regularly—well then the market to me is one to not expect it to be holding up in any one direction for a long period of time.

There are exceptions to that, obviously. Exactly on September 1, 2010, when it rose nice and steadily with a little hiccup in November, but basically went all the way through February of 2011 with a nice steady rise.

In fact, I’m wondering if that’s going to happen again, once we get out of the summer and into the September and October period, but I’ve just watched and watched, analyzed, and to me, there is just too much volatility. There is too much manipulation of the market that is caused by many factors, I’m sure.

I don’t know the ins and outs of all the high-frequency trading and computer-based trading and so forth, but I just don’t consider it a market that is consistent enough to sustain a direction long enough to be in multiple positions for months and months and months.

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Kate Stalter: Let me ask you this, Lewis. What are some of the 2X and 3X ETFs that you have had some success trading in lately? Of course, with the caveat that this is not a strategy that you suggest for every investor.

Lewis McLain: Right, well, the ProShares UltraShort QQQ (QID) and ProShares Ultra QQQ (QLD) would be the 2Xs that I have used often. But my favorites are Direxion Daily Small Cap Bull 3x Shares (TNA) and Direxion Daily Small Cap Bear 3x Shares (TZA). These are the 3X ETFs that basically work off of the Russell 2000 index, and it’s very volatile. That wouldn’t fit most people’s style.

I was surprised when I starting investing significantly in 2004, that I in fact have an ability to invest and sleep well no matter the market, if you will. So with the 3X, TNA and TZA, one bear and one bull, I find that I can do very well and they literally can move so much in any given day that even if I get underwater, it doesn’t seem to be long before it has recovered and I’m back in the green.

I will tend to hold and not panic when it’s not going my way. Unlike options, which I’ve just never been able to work for me, I don’t have to worry about anything expiring on me.

So, I’m patient. I monitor the market all throughout the day, but my favorite day is when I can make a decent profit within the first hour, or maybe even before the market opens, but within the first hour and be out. Maybe go back in, but maybe not.

I’m real sensitive about being a little bit too greedy, because I have had days where I did very well in the morning and just couldn’t stay out, and got back in, and gave it back up. I don’t like to do that.

Strategy-wise, it’s just me and my own money. I wouldn’t be comfortable running anyone else’s money with that kind of a strategy. It works for me.

It works in this kind of a market. I mean, how many days have we had a 1% to 2% swing in both directions in the same day? That can make a day trader a lot of money.

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