Simple Moving Averages

Paying attention to simple moving averages can often tell you when to buy or sell stocks. For example, the 200 day moving average for a broad market index like the S&P 500 tells you whether we are in a bull market or a bear. Generally, if the S&P daily price is above the 200 day average with a positive angle upward, it is safe to be in stocks.

You can sometimes make money if you notice the stock market is in a repeatable trading range. You could dial in a moving average like 13 days or another number to determine when to buy and sell. The danger here, however, is that the stock market might break out of its trading range at anytime, and it might go in the opposite direction from what you expected.

The best use of the moving averages occurs when we are in a bull market. If the trend is pointing upward, you can buy the dips in the price chart. Beware if the S&P 500 is below the 200 day average, though, because most stocks trade together, and you never know when a bear market will end or if it will get worse.

Diversification Plan

An investor must be diversified at all times to avoid financial ruin. This allocation should involve cash, stocks, and bonds among different sectors and companies. Of course, you will have slow growers in the group that limit your overall gain, but putting too much money on one stock because you are certain that it will gain a lot is a recipe for disaster. You have probably heard the cliche "the devil is in the details", and the odds are great that something unknown in the stock market will strike down your favorite stock pick when you are counting on it the most.

For example, suppose you thought the stock market bottom came in August of 2011, and you put half of your money on ERX, the triple long energy ETF. If this was $10,000, and you bought ERX at $40, you would have lost more than 25% or $2,500 before ERX finally hit the bottom October 4 briefly at $26 per share. Then, what if you had a panic attack and sold ERX when it got around $30, and you loaded up half of your money on TVIX because you thought we were going into a bear market? You not only sold while you were down, but TVIX dropped 25% from its high during the first week in October. So, you would have lost thousands of dollars more back to back.

Do not put half or all of your money on anything no matter how desperate or certain you are about a stock or the market direction. You will often be wrong due to unknown stock market variables. This can also be at the worst possible time if you need the money. For example, the Fed might suddenly do some quantitative easing to avoid a recession at the very time you have gone half in betting on a bear market. So, the government could cause a big boost in stocks at any time. Then, the bulls will suddenly take your money before you can get out of a bad trade.

Here are ten stocks you could buy for diversification, and you should sell them whenever you have a good profit on them. Then, keep that money in cash for whenever you can buy them again at the annual low point.

1. ERX, the triple long energy ETF stock.

2. TVIX, the double volatility stock for bad times.

3. AGNC, a REIT that was paying a 19% dividend in 2010 and 2011.

4. TNK, an oil tanker company that was paying a double-digit dividend in 2011.

5. JNK, a bond ETF that pays around 8% annually.

6. RCS, another bond ETF that pays 8% or better depending on when you are in it.

7. MCP, a strong company involved in rare earth minerals.

8. AGQ, a double long silver stock.

9. GLD, the gold trust ETF.

10. DIA, the Dow stocks ETF because they are the strongest group.

Long and Short

Since the stock market can reverse direction at any time, it is a good idea to be both long and short at the same time. The catch is that you have to buy your long or short position when it is near one of its low points in order to profit a lot. Then, when the stock market makes a hard move up or down, you can make 10% in a day if you are in the right stocks. If the macro movement of the market is firmly in one direction for weeks at a time, you could even make as much as 100% or more in leveraged ETFs.

For example, the stock market had been beaten down for weeks at the end of September 2011. Then, on the second day of trading in October, the Dow jumped 153 points signaling a possible change in the trend direction for stocks. ERX, the triple long energy bull ETF that is related to oil, jumped 8.5% for the day. If the stock goes from its low of $28 to its high of $85 in the next few months, you will have a 200% gain! Even if it takes a year for ERX to climb to its former high, a 200% gain would be fantastic for a year's investment.

Then, on the other side of the coin as I have recently suggested, TVIX is great stock to own whenever volatility is high and times are gloomy for stocks. The financial condition of the U.S. and the world is still on shaky ground. You could have also made over 200% on this stock if you had bought it in June or July before the stock market started its downtrend.

So, remember to buy winning stocks when the market is going against them. Then, simply hold on for a few months for double or triple digit gains whenever the general trend goes a couple of months to the downside or the upside. There is enough bad news in the world to bring stocks down for an extended period at least one time each year. Then, on the other hand, we have enough bulls in the world to send stocks up for at least a couple of months each year. Just be willing to buy winning stocks when they are cheap and have the patience to wait until they jump significantly in their prices. You only have to hang on a few times each year to make a fortune!

Sell REITs

Now is the time to sell your real estate investment trusts. The double-digit dividends will not offset the double-digit capital losses that are on the way due to recession fears. Highly respected Annaly Capital fell almost 5% on Monday, October 3, 2011. American Capital Agency dropped around 4.5% in addition to previous declines. Then, for a real scare, Armour Residential slid 13%.

REITs are great when interest rates are low as long as there is no immediate chance of a recession. They can easily borrow cheap money, and then farm it out for a much higher rate. But only a few people will have any money to spend in a recession or depression. Hence, REITs cannot make money in today's environment where the world is about to tear apart at the seams. Financial catastrophes are looming in the U.S. and Europe. China cannot bail out everyone either because they are starting to have problems of their own. TVIX, the double VIX ETF, has gone from $25 at the start of August to $100 today. It can probably go to $160 before the volatility ends. If you don't want to be in cash or quality bonds, TVIX is your best bet for profit when the stock market makes an avalanche to the bottom.

Stock Market Volatility

If you have not heard already, the Economic Cycle Research Institute said recently that a new recession is unavoidable. This is a reputable organization that is stating this situation based on economic fundamentals. Technical charts have also been pointing out this fact for the last two months. Now is the time to be in cash, in stock shorts, or long volatility indexes like VXX or TVIX.

For example, TVIX attempts to double the current VIX volatility reading. It was selling for $89 per share at the market close on September 30, 2011. If you had been paying attention to TVIX at the first part of August 2011 when Congress was deadlocked, you could have bought the stock for $25, and you would have made over 200% so far on your short-term investment. The 9-day simple moving average crossed over the 50-day moving average on high volume in the first week of August, and that was the signal to start betting on TVIX. As the bad events of August and September gradually unfolded, TVIX made its rocket run.

It is not too late to buy TVIX, though. If the ECRI and other bears are right, a new recession will push VIX to a reading of around 80 like it was in the last bear market, and TVIX will be selling for around $160 by then. So, you can buy now and make over 75% while the stock market sinks in the coming months.

Deflation versus inflation

The current stock market condition at the end of September 2011 was a deflationary environment rather than inflation. The ECRI is indicating a recession ahead. Money availability is tight, and people will not be spending much at all. This situation has caused oil, gold, silver, and copper to fall. The only stock market bets that are dependable are shorts and volatility ETFs like VXX and TVIX.

Normally, when interest is low, stocks will grow. When the Federal government is printing money, stocks will grow also, and this is when gold and silver will be bought as a hedge against inflation. However, the FOMC is not currently doing any more quantitative easing. Since inflation is no longer on the horizon, people will prefer cash and bonds over stocks and precious metals. So, an investor needs to be aware of the macro view of the economy at all times to avoid financial loss.

Bear Market

The stock market is now in a bear market downtrend. Several reasons can be given for this from both charts and fundamentals. The S&P 500 is having lower lows and lower highs. ERX, the triple bull oil ETF previously had a trading range between 39 and 48, but it has now broken down to the $31 area.

The FOMC is also out of bullets to fight unemployment and boost the economy. Our current situation is very similar to Japan's economy where their stock market has not recovered in 30 years in spite of low interest rates. The government cannot raise money to create jobs because the Republicans will not allow it. The IRS will have a constant shortfall in funds until millions of the unemployed are put back to work. Then, to add more grief, China manufacturing is down and Greece has not yet been fully delivered from its financial problems.

What can we do to make money in this environment? You can make big bets on more volatility. The VIX is now more than 40 and climbing. The VXX volatility index ETF is over 50 and TVIX is around 90 and steadily climbing. I think VIX will ultimately make it to 80 just like it did in 2008 when financial problems were great and a recession was coming. Now is the time to buy TVIX, the double VIX ETF. If VIX goes to 80, TVIX will go to 160. That will be a 77% gain from the current TVIX price of around $90. Even if TVIX does not get to 160, it will surely be a double-digit gain from here while the rest of the stock market tanks. Please do your own research before buying or selling.