(01/16/12) The First Home Run ETF of 2012

January always means reflection and prediction, a look back and a look forward to assess where things went right (and wrong) and how to take advantage of the existing trends for the next 12 months and beyond, writes Doug Fabian of 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 all of your various assets and portfolio holdings.

In this service, our goal is to swing for the fences and to go after home run trades. I’m talking about double-digit percentage gainers at a minimum, with the goal of trying to achieve 20% to 40% gains on the positions that we take.

In 2011, we saw some very nice double-digit percentage winners. Our six biggest winners last year 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, getting gains of 20% to 40% isn’t going to be easy. To capture this kind of upside, you have to pick the right ETF, and pick that ETF at just the right time.

You sometimes can be right about a trade’s eventual trend, but just not right when it comes to the timing. Well, when trading for short-term gains the way that we do in this service, you have to buy at just the right time if you expect to get those home run trades.

What this situation means is that identifying sectors—and the best ETFs exposed to that sector—that are setting up for the next big swing higher is the essential task for us.

It also means that 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. You see, this service is all about the big gains, and that means sometimes you have to stay patient and wait for those gains to come to you. In baseball terms, you have to wait for that right pitch before you can hit it out of the ballpark.

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 (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 the home runs that we seek in this service. 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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