The first home-run ETF of 2012

This fund plays on continuing weakness in a downtrending sector.

By Jan 18, 2012 10:14AM

Medioimages/Getty ImagesBy Doug Fabian, ETF Trader

The beginning of the year is a great time to take stock of what you're doing with your money. It's also a good time to reiterate the goals and objectives of your various assets and portfolio holdings.

In this business, our goal is to swing for the fences and chase home-run trades. I'm talking about double-digit percentage gainers at a minimum, with the aim of achieving 20% to 40% gains on the positions that we take.

In 2011, we saw some very nice double-digit percentage winners. Our six biggest plays were:

  • UBT    ProShares Ultra 20+ Year Treasury              11.58%
  • EPV    ProShares UltraShort MSCI Europe              12.17%
  • FXP    ProShares UltraShort FTSE China                16.11%
  • DTO   PowerShares DB Crude Oil Double Short   19.04%
  • DUG   ProShares UltraShort Oil & Gas                     22.97%
  • EEV    ProShares UltraShort Emerging Markets      24.01%

Now, to be certain, gains of 20% to 40% aren't going to be easy. To capture this kind of upside, you have to pick the right ETF at just the right time. You can be right about a trade's eventual trend but wrong when it comes to timing.

Identifying sectors -- and the best ETFs exposed to those sectors -- that are setting up for the next big swing higher is also an essential task for us.

If we don't see a setup in the making at that moment, then it doesn't make sense to jump headlong into a position. Sometimes you have to stay patient and wait for those big gains. In baseball terms, you have to wait for that right pitch before you can hit it out of the park.

Right now, we have just one position that I think does have the potential for a home run, and that is the ProShares UltraShort Basic Materials ETF (SMN). Although this position is currently in the red, the fund remains safely above its stop-loss price of $16.50. I think the trend going forward in the basic materials sector is going to be lower, and that means we could see a quick turnaround in the fortunes of this inverse sector fund.

As I've said during the past couple of weeks, I wouldn’t be too surprised if stocks were to move a bit higher from here. However, I also think the dual headwinds of Europe's debt crisis and China's economic slowing will continue to drag stocks significantly lower soon, especially after the initial new-year buying dries up.

I think the current environment soon will yield some very nice setups, and that means we stand to hit more than our share of home runs. For now, we will wait until traders' moods catch up with the reality of the fundamental decline we're seeing in Europe and China.

Once the reality on the ground matches traders' perceptions, we will start to light up the scoreboard with big winning trades.

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