Two Ways to Play a Bounce

02/04/2009 11:58 am EST

Focus: ETFS

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of ETF Trader, says investors can make money in bear market rallies, and he recommends two ETFs that should gain in short-term rallies.

One of my big themes for 2009 is taking advantage of what will likely be a series of short-term bear market rallies. This is not to say you can't make some good money in bear market rallies.

One of my other big themes this year is that you need to have enough cash on hand so that you can take advantage of bear market rallies as they occur.

[The recent] move higher in the equity markets has pushed two ETFs on my watch list above their respective 50-day moving averages. Both the iShares MSCI Emerging Markets Index (NYSEArca: EEM) and the Ultra Basic Materials ProShares (NYSEArca: UYM) now have broken above their respective short-term technical resistance levels.

Given all of the pent-up demand for stocks in both of these sectors, I think we are looking at a nice snapback rally that could give both of these funds a very nice push to the upside.

EEM seeks investment results that correspond generally to the price and yield performance of the MSCI Emerging Markets index. The fund generally invests at least 90% of assets in the securities of its underlying index or in ADRs and GDRs representing such securities. The index was developed by MSCI as an equity benchmark for international stock performance.

I see EEM as a great way to play the bounce in international equity markets. These markets have taken a severe beating since the whole credit crisis kicked into high gear. The pullback so far in 2009 has been fierce, but now I think we are likely to see some nice gains—at least during the next several weeks and possibly beyond. (It closed around $23 Tuesday—Editor.)

UYM seeks daily investment results, before fees and expenses, which correspond to twice the daily performance of the Dow Jones US Basic Materials index. With UYM you are getting the benefits of leverage on one of the most-beaten up sectors of this bear market—commodities. So, if the Dow Jones US Basic Material index goes up 2%, UYM will move up 4%. (UYM closed at $12 Tuesday—Editor.)

The move above the technical resistance on both EEM and UYM bodes well for each fund’s short-term future, and that is what we are taking advantage of with today’s move.

To protect yourselves from any significant downside in both EEM and UYM, I want you to place a 10% trailing stop loss order along with your order to purchase each of these two funds. During bear market rallies, it’s vital that you have a trailing stop loss in place whenever you make any kind of equity purchase.

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