Trading the Final Day

Seasonality and technical analysis stems from the idea that investors are partially predictable. Those that believe in technical analysis can reap the benefits of the daily fluctuations that exist in the market without concerns on the fundamentals of the company or the economy. Yesterday, I pointed out that the final hour has become a trader's paradise as momentum up- or downward has become extremely predictable as the final hour unfolds. Today, I would like to point out another profitable trade that has worked for me.

Since November 2009, the first trading day of every month has been a positive day for the Dow Jones with an average gain of 88 points. Most believe that this is typical because new money from managed investment funds enter the market on the first of each month, creating a small but predictable push.

So what trading vehicles allow you to capture this behaviour? Instead of choosing a stock which may decide not to move with the market, one should consider purchasing an ETF. For the Dow Jones, this would be the Diamonds Trust [DIA:NYSE], for the S&P 500, this is the "Spiders" ETF [SPY:NYSE], and for the NASDAQ, it is the "Cubes" or Powershares QQQQ Trust [QQQQ:NSD]. These three ETF's track the exchange on a 1:1 ratio. You can also purchase calls or puts on these as well which can limit your risk to just a fraction of the cost.

If you're looking for leveraged ETF's to potentially double your profits (or losses), you can purchase some of the Proshares Ultra ETFs: The Dow Jones [DDM:NYSE], the S&P 500 [SSO:NYSE], and the NASDAQ [QLD:NYSE]. These three products provide double the exposure to the market. A full list of products, including inverse products for hedging and triple exposure, is available on their website.

There are always simple patterns that develop in the market, and the brave will try to take advantage of it. However, we were in a bull market for over a year, and now that the market is in correction mode, we may not see this pattern develop. For those that want to take the chance, the aforementioned products may allow you to capture the move of the market with little margin and less risk compared to a common equity.