8 Big Picks to Win in Q4 and Beyond

11/03/2011 7:00 am EST

Focus: MARKETS

Jerry Slusiewicz

President, Pacific Financial Planners, LLC

Investors and traders can both take advantage of year-end seasonality, says Jerry Slusiewicz, who gives five ETF recommendations for each style of trading, describing to MoneyShow.com how technicals might guide a buy decision. He also shares three of his top current stock picks.

Kate Stalter: I’m speaking today with Jerry Slusiewicz. He is a columnist with ETF Profits at TheStreet.com and he also runs Pacific Financial Planners.

So Jerry, let’s start by talking a little bit about the ETF market and what you’re seeing, particularly with regard to some of the market volatility.

Jerry Slusiewicz: There is some negative press out there about ETFs, and in particular about leveraged ETFs. I think the ETF market is a phenomenal place for investors. It’s kind of the new mutual fund.

I’m sure everyone is aware, but there’s more transparency. You can figure out what you own all day long, any day…versus mutual funds, that are kind of that black box where you only know really a couple of times a year what you used to own.

Again, it’s from a tax situation, especially this time of year. In November and December, people are going to start getting their 1099s or their reporting of capital gains and capital losses in mutual funds. Profits they may or may not have realized in the old mutual funds. You just don’t see much of that in the ETF sector.

As well, I’m a big risk-management proponent, a user of stop losses even on entry points—I sometimes buy stops above the market. You can just do that so well with the ETFs. So I’m a big proponent of ETFs, obviously.

In the marketplace right now, there’s a lot of volatility going on. That’s why I think it’s even more important to know what you own using a transparent ETF and to use the stop loss to protect your capital in case we get into these volatile markets where things go down.

Now with that said, people will always refer back to that big meltdown day back in May 2010, in saying that stop losses don’t work. Well, there’s no holy grail, but prior to that there was plenty of opportunity to get out of the market in some of the stops executed, as well as if you use the larger, more liquid ETFs as opposed to some of the smaller, less liquid ETFs. The likelihood is that you’re not going to get into some situation where you get stopped out at a really bad price.

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Kate Stalter: So what are some of the ETFs that you would suggest investors take a look at?

Jerry Slusiewicz: There’s a tremendous amount of volatility in the market, but it does appear to me that the broader market, let’s say the S&P 500—the SPDR S&P 500 (SPY) is a proxy for that…

When it broke out last above its 200-day moving average, and more recently above that trading range, above $123.50—$121.99 was the midpoint of that trading range—when we broke above that, it was a good signal that things might get better for a year-end rally.

Now right after that happened, we had Monday and Tuesday of this week with Halloween and November 1, where the markets sold off on pretty good volume. Well, that gives investors a buying opportunity into SPY, which is again the proxy for the broad market index, the S&P 500.

It closed on Tuesday at $122.04. I think there’s a lot of support around $119. I’m not even saying it’s going to get down to that level, but the S&P 500, Kate, right now has a cheap valuation.

The stocks on that index are trading around 12.5 times earnings. That is about 30% cheaper than the historical 15 or 16 times earnings that we’ve been trading at for the average of the last 30 years. So long-term investors buying today can do very well for themselves.

So what I would recommend is take a nibble at SPY, and hold onto that. I would use a stop loss below the year low, which was $107. Somewhere in the $119 to $122 range down to $107, you’re risking around 10% on something that can do extremely well to the upside going forward as a long-term hold.

Conversely, I think that things have kind of changed for bonds. In the bond market, I think that we’ve seen the low in interest rates for some period of time, if not a long period of time.

Interest rates have been in decline since the early 1980s. Yes, they zig and they zag and they go up and they go down over a period of time, but overall we’ve been in a secular trend for lower and lower interest rates. We got down to about a 1.7% ten-year Treasury, which is at 60- to 70-year lows. I mean Great Depression-type levels.

So there are some changes that have caused me to rethink that, and I do believe that we’ll start seeing interest rates rising.

Now again, we’re talking about long-term investment versus trading strategies, but on a long-term investment strategy, if we are going to see higher long-term rates and investment in an ETF, the ProShares UltraShort 20+ Year Treasury (TBT)…I think that that could do extremely well. It closed today at $19.23. The year low was $17.90, so I put the stop maybe at $17.90.

I think that that thing can make investors a tremendous amount of money on a long-term basis, especially if you’re patient, because the catalyst might be what’s happened over in Europe on this recent bailout. They have something called credit-default swaps, and simply, that’s an insurance against a default on a bond.

We saw this happen with the General Motors (GM) bonds here in America a couple of years ago. Now it’s the sovereign debt bonds with Greece, where they’re telling investors who bought a Greek bond, who said, “We’re not sure this is really going to pay off. So we’ll collect this coupon, but we’re also going to buy insurance from somebody else that says if they ever short me in terms of my full faith and credit of the principal of $1,000, I’ll get it from the insurance company.”

Well now, the European Union has deemed that it’s not a default, that the investors have to accept the 50% haircut, so they’re only going to get 50 cents back on the dollar, and they can’t collect that from the insurance company because it’s a “voluntary default.”

So what’s going to happen going forward, Kate, is investors are going to realize that buying the insurance doesn’t work. They’re going to need to force the issuers of bonds—in particular sovereign bonds, and I include the United States, who has got about a 90% debt-to-GDP ratio here as a sovereign bond issuer—they’re going to say we’re going to need a higher coupon, a higher interest rate, for us to buy those bonds.

If you have higher rates in bonds, the price is inverse to the rate. Higher rates mean lower prices, and you own the price. I think we’re going to see interest rates rise, which means a lower-priced TBT as an inverse, which would benefit from rising interest rates.

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Kate Stalter: Makes a lot of sense. Any thoughts, Jerry, on some of the leveraged ETFs, or any of these other instruments? I know that more short-term traders tend to look at those, rather than longer-term holders. Any thoughts on those?

Jerry Slusiewicz: Well, Kate, I put out a piece just yesterday on the Russell 2000 Index ETF (IWM), saying that index has been the leader.

In that sector, Russell 2000 small caps, From the low of March 2009 to the high in April for the entire market, it was up around 155%—much better than the S&P or the Nasdaq or the Dow. So I thought that was a leading indicator.

On the decline from April to the lows on October 4, it was down 30%, where the markets barely crossed the threshold of a 20% bear market intraday in October, so it led the way down. Yet from October 4 through last week, it went up 17%; again, better than the S&P has had, but technically it did not cross the 200-day moving average.

So I put out a piece yesterday saying as a trade—you see, that’s the difference between trading and investors. The first two recommendations were investment recommendations. This one here was a trading recommendation: The Direxion Small-Cap Bear 3x ETF (TZA)—it’s only for aggressive traders. I said buy that for a trade to the $40 to the $43 range. It’s still at $31 today.

I actually feel pretty confident that that trade could work out in a very short period of time while they’re trying to straighten out this uncertainty that has just occurred in Greece. Some of this had to do with the Japanese intervening on the dollar.

The point is that leveraged funds have their place, but they have to be for big boys and girls that understand risk and leverage. The other place that I think leveraged ETFs makes a lot of sense is seasonally, and we’re entering that season right now, Kate. The season is the end of the year.

Let’s say you have a portfolio and you’ve got a blended portfolio where you have some SPY, some mid cap, the SPDR S&P 400 (MDY), and you’ve got the small-cap IWM, and you’re a buy and hold long-term investor. You want to hedge that position, because you think that the market is going to go down or whatever. You can buy some of those inverse ETFs as a hedge to kind of neutralize your position to get you through year-end.

I don’t know about 2011, because the returns on the market aren’t that much, but in the last couple of years—2009, 2010, when the returns were pretty good—people had double-digit returns. This time of year, you can use those to hedge against risk in the rest of your portfolio.

So these commentaries or pundits that are coming out against leveraged ETFs, I understand that they don’t want the average person who doesn’t understand risk just buying it, but I think they’re great. They’re really a good tool for sophisticated investors to use as an absolute trade or as a hedge against their portfolio.

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Kate Stalter: Let’s switch gears a little bit. You and I have often talked about some individual stocks, particularly some growth-style names. Any of those that are on your radar these days, Jerry?

Jerry Slusiewicz: I think once again that what we’ve seen here this year is a very whipsaw-type market since April. Maybe that had to do with the end of QE2 or some of the more glowing issues that were growing in Europe, but stocks have fallen quite a bit.

I’m always the guy who likes to buy the leading stock and the leading sectors. But like 2009, there are times that I say, “Hey, there’s value out there, and it’s a good time to become a technical value seeker.”

So there’s about three names here that I can go through really quickly. The first one is Ferro Corp (FOE). They deal with coatings and glazing, plastic chemicals, etc., in the electronics and pharmaceutical market.

This stock has come down quite a bit—from $17.84 early in the year, it’s $6.68 today. Today, it traded on huge volume of 4.8 million shares, almost 3.5 to four times daily volume. It is right at its 50-day.

I’d love for this thing to go above $6.96, and I think that it could easily get to $10 or $11 a share and maybe even more. Its 200-day is trading all the way up to $12.

I think that that could be a big winner. You can put a tight stop at $5.15 to protect yourself. I know that’s a little bit of risk, but for the upside I think that that’s pretty good.

The next company that I will mention is Radian Group (RDN). Interestingly enough, they do mortgage insurance for the lending institutions.

I know financials are extremely beat up. This is a very risky stock. You know, some people call anything under $5 a share a penny stock, but it wasn’t always at this level. I mean it was $9.73 earlier this year.

Trading at $2.55, again another big up day, huge volume. Over 200% of the daily volume today, breaking above the 50-day moving average. It peaked its head a little bit above the resistance, which was $2.73, closing at $2.55.

If we can get above $2.73, I think we easily get to $4 to $4.25 on this stock. Again, same thing, your risk is down to about $1.80, so put a stop at around $1.75 on RDN.

The last one, the one I like the most of the three names that I will give you, because those two I think you need to watch for, maybe in the next day or two, coming into the buy range, but is this Bridgepoint Education (BPI).

As you may know, Kate, as the educational stocks got into all kinds of issues earlier this year, as to whether they were a creditor or not. These were the for-profit, post-secondary educational.

This stock was $30.62 at one point. It’s 22.99 today. It broke out on huge volume today. This was up 6%, it’s still easily buyable. It’s in the immediate buy right in here. $22.14 was the pivot point. It might have a little resistance to $23.10.

It’s above the 50-day, and the 50-day and 200-day are riding together. It look like the 50 is going to cross back above it on a golden cross. Earnings look tremendous—28% last quarter, 55% before that, 88% before that. All double-digit earnings and revenue growth.

I can’t say enough about this one. This is my favorite position to buy today, BPI, Bridgepoint Education.

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