Your First Ever ETF Trader’s Edge Picks

It is with great honor and excitement that we send you the first issue of ETF Trader’s Edge. It is a privilege for us to be at your service. Our intention is to bring you very profitable trading ideas over the course of our relationship. For you to place your trust in us is truly appreciated and we will work tirelessly to exceed your expectations. It has been quite a year so far in the investment markets. Extremely volatile markets make most investors very nervous but for us as traders, they present opportunities for short-term profits. We look forward to the weeks and months ahead as we seek to profit from the current state of the markets.

First, let’s start with a bit of housekeeping. Please note that ETF Trader’s Edge is for the aggressive portion of your portfolio. We plan to build out positions in the days and weeks ahead, so keep on the lookout for special alerts. It is our intention eventually to have 8-10 open trades on at any one time. These may be either direct exchange-traded fund (ETF) purchases or options positions. Keep these guidelines in mind when making your trades. Leave some cash on hand for future purchases. When it comes to our options trades, we intend to take advantage of the combined experience of Tom Lam and me. We may buy puts and calls, sell options to generate income, trade multiple-legged options over different months, and we may also sell a put and buy a call. Simply said, you may see single option trades or multi-legged spreads. We plan to have this service include options education as a part of what you receive from us. We will not recommend an options strategy that we have not fully explained first.

Now, here are our first trades in this service.

We believe we have found a dislocation in the marketplace. XLU has had a fast start to 2016 with a gain of 6.4%. XLU is the Utilities Select Sector SPDR ETF. Utilities are sometimes considered a safe haven in a market storm and have been so far this year. While the three-month implied volatility of almost all market sectors has moved 2 standard deviations, utilities remains near 1.5 standard deviations away from its average. Moreover, utilities’ relative strength index (RSI) is fast approaching 70. Levels above 70 would indicate overbought conditions whereas levels below 30 indicate oversold conditions. All of these factors combined lead us to our opinion that XLU has moved too far, too fast. This presents us with an opportunity to profit from a decline or pullback in XLU. Buy the XLU March $46 puts currently trading at $0.98. If you were to purchase 10 put contracts, it would cost $980 ($0.98 x 10 x 100), and 5 contracts would be $490. It is up to you to determine position size for your account.

Buy XLU March $46 puts (XLU160318P00046000) that expire at the close of trading on March 18 and are currently priced at $0.98.

Our next two trades revolve around gold.

After languishing in 2015, gold has formed a nice rounded bottom. We believe gold is breaking out into a new uptrend. So far, the ETF GLD is up 6.5% in 2016. While it is already above its 50-day moving average, it is about to break above its 200-day moving average and should gain momentum from there. In our opinion, there are a few factors causing this positive shift in momentum — namely sentiment, market volatility and monetary policy.

Gold began its downturn in early 2013 and has been beaten down almost 33% since then. Despite having gained more than 51% in the preceding three years of 2010-2013, sentiment quickly turned from bad to worse. Talk of slowing demand from China and India is also adding to the dour sentiment. As investors know, markets trade in cycles and we believe the overwhelming bearishness is beginning to wane. Market volatility also has played a role in the positive turn. Nobody cares about gold when the markets move higher and higher year after year. But when things get bumpy, everyone remembers that gold is a safe haven. We believe volatility will continue to shake markets in the short term and more investors will make the flight to safety.

While monetary policy does not play a direct role in the prices of gold, it does influence the perception of growth and interest rates. Until recently, the U.S. Federal Reserve had taken a position of jawboning about making multiple short-term interest rate hikes to quell inflation. Without the threat of inflation and under the vow of rate hikes, hard assets such as gold are challenged. We believe this policy path is currently severely challenged — given the state of global economic growth and the fact that the Fed is currently one of the only central banks to be embarking upon financial tightening.

Taking into consideration the turn in sentiment, the market volatility and a potential shift in monetary policy, we believe we will see continued gains in gold and gold-related ETFs. To take advantage of these factors, we have two trades for you. First, buy the ProShares Ultra Gold Miners ETF (GDXX), which is a leveraged 2X gold miner play. Second, buy SPDR Gold Shares (GLD) April $109 calls. You may be wondering why you should buy April calls instead of March calls. The Fed meets March 16 and we believe the aforementioned monetary policy shift will provide gold with an additional tailwind.

Buy ProShares Ultra Gold Miners (GDXX).

Buy SPDR Gold Shares (GLD) April $109 calls (GLD160415C00109000) that expire at the close of trading on April 15 and are currently priced at $2.97.

Good luck out there and remember to trade when you can, not when you have to.

Best,

Doug and Tom