direxion Funds is schedule to release 3x leveraged funds to the market.

BE CAREFUL!  As with most of these leveraged ETFs, the literature is a bit misleading:

"Direxion Shares powerful 3x leverage (the highest in the ETF and mutual fund industry) seeks to amplify the performance (positively or negatively) of your investment capital by 300%".  So when the market is up 20% by the end of the year as the world embraces Barack Obama and Santa Claus is throwing money from the sleigh during the Santa Claus rally, you're going to be up a cool 60%, right?  Not likely.  Depending on the volatility, you could underperform unleveraged assets and I'm not talking about if it just goes straight down.  The goal is to mimic the day-to-day movement.  If the Russell 2000 is up 1% for the day, the ETF should be up around 3% for the day.  That's the extent of the following.

Is this a bad vehicle?  As most things, it depends on the situation.  I don't recommend any of these products when they have no track record.  I've yet to have someone come to me and tell me that they were pleasantly surprised that their investment product returned above and beyond what they expected.   This isn't Monopoly, so there's never a bank error in your favor.

Definition: the practice of extorting money or other property, especially by a public official, by the use of threats

Sound a little bit like what's happening to us through this bail out plan?  The threat is financial armageddon.  The threat is that without it, your retirement goes bye-bye.  Such a shame.

Back to the market, I'm investigating some additional "free butterfly" items.  I've been looking for items that are in a relative range with high volatility.  My best candidate right now is gold.  GLD is in a bit of a range, and at the present, seems to be in the middle of a range.  I'm going to add this to my watch list as when extremes are hit on the range, I'll open a vertical spread.  Why a vertical?  Because I don't really want to own gold.  My long stomach is feeling a bit full at the moment.

Any other ideas for issues to try flys with, please add a comment. 

Two things I've blogged about on a regular basis are options trading and new ETFs coming to market.  Given my (even more) hectic schedule lately, my research time and as a result my number of trades has suffered.  Maybe that's good in this market, who knows.  The second item is ETFs.  I subscribe to a number of ETF feeds to keep my finger on the pulse of this emerging product line.  Many speculated during 2007 that the number of new ETFs coming to market was getting ridiculous and the focus of them was getting too specialized.  It got to the point of why bother picking up the ETF, may as well just buy the "best" stocks they hold in the sector and go from there.  I've been looking for numbers to see how many ETFs were opened vs. closed this year and haven't found a definitive list, but I will say that the introduction is slowing and I'm getting a lot more "headlines" that read like this:

• XShares To Close 15 HealthShares ETFs
• Beware of ETFs Closing
• Claymore ‘Acts Responsibly’ and Closes 11 ETFs

Pay attention to the inflows or outflows and understand the risks of entering a new ETF.  So what happens when your ETF is closed?  Well, nothing too serious because the shares are liquidated and you get your money back.  OK, I get my money back, what's the problem?  Well, it may become a taxable event and one of the main advantages of owning ETFs is tax efficiency.  Also, having your shares dumped may become a problem because you might have a hard time getting back in for one.  And you're on the hook for more commissions should you decide to get back or try and reconstruct the ETF holdings yourself.  It could turn out to be a costly event in the unfortunate event.

Even with my hectic schedule, there hasn't really been an ETF introduced in recent weeks that has caught my attention.  There seems to be a lot of consolidated type ETFs where they're holding many different asset classes and performing the rebalancing for you.  I also expected that the actively managed ETFs may bring on a flood of new and interesting products, but not a whole ton.

Has the creation of new ETF products peaked?

I've been bestowed the honor of putting together and executing someone's asset allocation plan.  I'm not a professional advisor, but this was a family member so I guess I don't have to be.  Anyway, it was pretty fun.  I got to explain some of the in's and out's of asset allocation and also got to hear about their objectives and goals.  I think we all have a little speculative blood in us because this person was convinced that clean and green along with pharma was going to bring outsized returns over the next 5 to 10 years.  I'm not sure I agree, but it wasn't really my place to argue.  The only thing I could do was keep the speculative piece of the portfolio to a size that was not going to harm the longer term objectives.  So anyway, here's what we sat down and came up with.

The real goal here was to be about 70% stocks, 20% bonds, 5% real estate, 5% speculative.  Within the stock portfolio, we wanted some international and small cap exposure.  I don't know enough about bonds to tweak the maturities, so I went with the total bond market fund mixed with some TIPs.  I'm also trying to keep the transaction costs down, so spreading across maturities didn't seem like a good use of commissions.  That could be my bond ignorance talking though.  And finally, I tried to keep the percentages of allocation simple.  I'm sure we could tweak the international and small cap a bit higher and achieve better returns over time, but I like keeping it fixed at nice round numbers so that it's easy to digest.  I'll let the family member tell me if they want to get heavier into assets that they can see are clearly outperforming.

 Yesterday's action was very typical of a bear market.  You had plenty of panic where well known names were down double digits.  You had a futures market that was up sharply only to close down.  Two more interesting things have happened.  One, the VIX has spiked to a 3 month high and two, the futures are down sharply again this morning.

I go back to the last bear market as my guide.  What's up was down and what's down was up for the longest time while we wrestled the bear of 01-03.  It wouldn't surprise me to see us either close down very sharply (read, 300-400 points down) or to close up.  To say it simply, I expect a lot of volatility today.

With the blood in the streets, I'm going to be looking to add to long term ETF holdings (again).  I have enough financial exposure, so I'll be eyeing some beaten up broad based indexes.  Also, if the covered call S&P 500 ETF looks good from a bid/ask spread standpoint (I watch the PBP), I'll pick up some of that.  No guarantees that I'm getting into anything today though.  What I have done though is come up with a plan well in advance of this day.  I have a spreadsheet I bring up show my current and desired allocations and what stocks or ETFs I want to comprise a particular allocation.  Now it's just a matter of pulling the trigger.  Which on days like today is a task in and of itself.  Gotta stick to the plan though.

Good luck out there today.

A comprehensive article on the ETFs and ETNs being offered to date.  It also explains the difference between ETFs and ETNs.  I mention them quite frequently, so if you do not know the difference, I highly recommend you take the crash course.

http://seekingalpha.com/article/30369-commodity-etfs-and-etns

One of the most successful ETF products to date is the gold ETF by streetTracks (GLD).  What makes this ETF fairly popular is direct access to the underlying.  Gold bars are held in vaults, not futures contracts.  This has proven that the price of the ETF tracks the underlying pretty well.

As the popularity of this ETF grew and grew fast, the question asked by option traders, is why we don't have options on GLD.  The reasons have varied from not enough volume (clearly wrong) to that the level of derivation was too much (again, wrong).  Apparently the market has spoken and the options are on their way.  If all of the hurdles are properly cleared the CBOE could list these options as early as the end of this month.

I'm not a gold lover.  An asset that seems to create nothing but volatility or at best, counterbalances volatility in your portfolio without actually creating real returns over time is not really for me.  However, I really like the idea of being able to play gold speculatively.  If the volume on the options is anything like the volume on the ETF, we could find ourselves with another liquid option set and that's always good news!

If you've invested or traded for any length of time, you have probably picked up an Investor's Business Daily once or twice.  It's a good paper and I find the news and articles very interesting.  The news of the day is really only half of the paper though.  The other half is dedicated to finding and analyzing stocks that match what is referred to as CANSLIM.  CANSLIM is an acronym for the criteria used to analyze stocks in the IBD.  Each week, IBD publishes a proprietary ranking known as the IBD 100 where the 100 best CANSLIM candidates are printed with charts and a brief analysis.  The thing that has always bothered me about CANSLIM is the subjective buying.  Apparently if something breaks out of a cup and handle, it's a buy.  Identifying this pattern has always been troublesome to me.  I've never traded CANSLIM for that reason.

But hey, you shouldn't have to worry too much about picking the precise entry point because the rest of CANSLIM has really identified a quality company that's going to be great for your long term holdings, right?  Not exactly.  As in previous comparisons, I truly enjoy taking on conventional wisdom with reality.  The reality piece being the price of the mutual fund or ETF that employs the conventional wisdom du jour.  In this case, we analyze the price action for CSSGX for the past two years.  We compare it against the S&P 500 benchmark.

(Click to enlarge)

In this timeframe, the underperformance has been pretty dramatic.  Did I also mention that for this performance you can expect to pay a hefty 1.7% fee?

According to this weekend's IBD, the IBD 100 performance since inception is +239.3%.  So what's the difference between a 5% return and a 239% return?  There could be a number of things at play.  Maybe the cup and handle yields impressive power.  If this is true, it holds more power and an more of an edge than any other chart pattern.  I'm skeptical.  Some more likely candidates are CSSGX doesn't necessarily invest in the same securities as those printed in the IBD 100, but the criteria should be similar, right?  Transaction costs may also be to blame.  Imagine if you had to buy and sell 100 securities a week.  Hard to make money with the commissions.

Whatever the case may be, if you're struggling with CANSLIM, you can plainly see that you're not alone.  Even the pros can't seem to get it quite right.

I will conclude by saying that I feel IBD is a great paper that is chock full of ideas.  It also preaches discipline and risk management which are extremely important concepts.  I would not follow the advice of the publication to the letter, but the concepts are dead on.

The headline from marketwatch.com reads Proposed funds up the ante to magnify stock market returns threefold.  So now it's party time because we're now going to average a return of about 30% per year given the conservative estimated 10% return per year on the S&P 500.  Before we go dancing in the streets, let's splash a cold dose of reality on this.  The fine print reads that they're attempting to mimic the move of the tracking index day to day, but returns over time may suffer tracking error.  Folks, tracking error is code for things won't add up and it certainly won't be in your favor.  When tracking error is discussed this is always referred to as returns less than that of the tracked index or basket.  Another misleading piece of the article is the reference to magnifying returns threefold.  Although returns are generally referred to in a positive context and risk is generally referred to in a negative context, let's focus on returns as both negative and positive.  So 3x returns also means 3x the losses.  Is this something you can deal with in your portfolio?

Let's have a look at how a simple 2x leverage fund stacks up against 1x ETFs.  This simple chart plots the QQQQ against its 2x leveraged product the QLD.

(click to enlarge)

Over the last two years, the leveraged ETF when simply held has created nothing but stomach churning.  And when the going got tough, the leveraged product got rough.  This product may be great for day trading and maybe swing trading, but buy and hold is clearly another story.  Based on this chart, you can probably devise a system for when the leveraged product deviates from the non-leveraged product to do a little pair trading or long one and/or short the other.  But that's also wild and speculative.  My point is that for a buy and hold investor, this doesn't make any sense.

Platinum lovers in the United States will finally get what they've been asking for.  Tomorrow, a brand new (probably shiny) ETN will launch along with its short counterpart on the NYSE.  The ticker symbols are PTM for the long platinum and PTD for the short platinum.  These will be brought to you by UBS E-TRACS.  Non-U.S. traders have had a platinum ETF on the market for over a year.  All U.S. traders who wanted platinum exposure could only do so through futures contracts, until tomorrow.

No information has been posted to their site at the time of this writing.