News Analysis date published New: 
Friday, August 31, 2012 - 13:30
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Friday, August 31, 2012 - 14:42
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Friday, August 31, 2012 - 13:30

2 Ways to Leverage the Next Major Market Move

Friday, August 31, 2012 1:30 PM

Summer is just about over, and that means the lull in the markets we've seen over the past several weeks also is about to cease. Once traders return to work after the Labor Day holiday, there's sure to be more action, more volume, and presumably, more volatility.

The question now is: Which way will the markets go next and how do we play it?

The bull camp and its proponents say that the Federal Reserve will step in with some form of "QE3" in their September meeting that will give stocks a boost going into the final three months of the year. These same bulls also argue that Europe's financial woes will largely be off the table due to guarantees from European Central Bank (ECB) President Mario Draghi that the euro will remain intact, and that the ECB is prepared to do what is necessary to preserve the region's currency, and to keep the EU together.

In this camp, you have bulls such as the highly respected bank analyst Dick Bove of Rochdale Securities. Bove recently told CNBC host Larry Kudlow that investors should buy stocks now, as the Fed has a history of stimulating the economy this time of year.

In the bear camp, they are worried about the Fed not coming through with some form of quantitative easing like everyone expects. There are also legitimate fears that the ECB will disappoint, and that the fiscal mess that is Europe will get progressively worse with no specific bailout measures in place.

Then there are fears that the looming U.S. "fiscal cliff" will combine to smack down stocks in the months leading up to the January deadline. The fear here is that a toxic cocktail of automatic federal spending cuts and automatic tax increases will carve a huge chunk out of the economy.

In this camp, you have the likes of Morgan Stanley analyst Adam Parker, who recently reiterated his call that the S&P 500 index will end the year at 1,167. That's a drop of more than 17% from current levels.

In a note to clients in mid-August, Parker argued that earnings will be lower than most sell-side analysts currently expect. He think EPS for the S&P 500 will be about $100 per S&P 500 share when the final numbers for 2012 are in, which is well below the consensus figure of $104. That, Parker argues, will be just one of the fundamentals dragging stocks lower in the months to come.

Now, as a market observer, trader, and someone tasked with picking sides in this argument, I have to say that I think both perspectives have a lot of merit. That makes calling the direction in stocks going forward a toss up at best. Given that the market is capable of going either way at this juncture, I have two recommendations -- one for those in the bull camp, and one for those in the bear camp.

Bulls: Buy ProShares Ultra QQQ
If you side with the bulls, then make a bold bet with the ProShares Ultra QQQ (NYSE: QLD). This exchange-traded fund (ETF) is a two-beta leveraged play on stocks in the Nasdaq 100 Index. This is the big-cap tech segment led by the likes of Apple (Nasdaq: AAPL), and its fortunes have been strong since the June rally.

The chart here of QLD shows that the fund bounced off its 200-day moving average in June, and has since made a big push higher almost making a new 52-week high. If you are willing to handle the volatility that a leveraged fund comes with -- and if you are a bull -- this is a great short-term trade capable of running up very fast.

The ProShares UltraShort QQQ (NYSE: QID) is the flipside of the coin. This two-beta leveraged fund is designed to deliver twice the inverse performance of the Nasdaq 100 Index. So, if QQQ falls 2%, then QID should move higher by 4%.

As you can see by the chart here of QID, it has not been a very good year to have a leveraged short position in the sector. Yet, despite the selling in this fund during the past 12 months, we can see a big surge of more than 25% in the value of QID from early April through early June.

This is the kind of surge is possible if stocks correct from here, and if that does happen, then you'll want to own a fund like QID. This ETF can make you very happy when all of your bullish friends are crying in their beers. So, if stocks begin to falter, then make QID your friend.

Action to Take --> I recommend picking up shares of QID at market price with a stop-loss call at $25.88. Look for QLD at market price with a stop-loss at $55.35

This article originally appeared on TradingAuthority.com:

2 Ways to Leverage the Next Major Market Move

Jim Woods does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.