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Since their introduction, mutual funds have been a very popular investing vehicles; especially for those who do not have time, enough resources and knowledge for active trading.

Advantages of Mutual Funds

1. Diversification: a typical mutual fund invests in 50 to 300 securities and thus has reduced overall portfolio risk. Generally, this level of diversification at individual levels needs huge amounts of money.
2. Portfolio management: by investing in a good mutual fund, you are actually hiring some professional portfolio managers to look after your portfolio. They buy and sell stocks and make necessary portfolio adjustments for you.
3. Easy to handle: mutual funds are relatively easy to buy and sell. They have low minimum investments like $2,500 or $5,000 and can be traded once per day at the closing net asset value of NAV.
4. Dividend reinvestment: the income from the funds can be used to purchase more shares of the fund.

Disadvantages of Mutual Funds

1. Not suitable for active traders: The facts that they are traded once per day as per NAV and have some sales charges make them unsuitable for active trading.
2. High expense ratios: mutual funds typically have higher expense ratio than index funds and ETFs. More over the fees including in buying and selling them can make them less profitable.
3. Management issues: the performance of the fund manager greatly determines the performance of the fund. Thus unnecessary trades, wrong market timings and poor replacements can affect fund performance.
4. Taxes: the capital gains from mutual fund investments are usually subjected to taxes at individual level.

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Williams %R, or simply just %R, is a momentum indicator popularly used by traders to find overbought and oversold levels. The indicator is similar to the %K of Stochastic Oscillator; the difference is that %R compares close to the highest high of a period opposing the lowest low as in stochastic oscillator. The formula is,


Where 't' represents today and n represents the number of periods.

Unlike most other indicators, Williams %R indicator has a negative scale; the values range from 0 (highest value) to -100 (lowest value). A close nearer to the highest high period will take the indicator nearer to 0 (overbought) and a close nearer to the lowest low of the period will take the indicator nearer to -100 (oversold). The typical period is 14, but traders can adjust it to make the indicator more or less sensitive.

Generally, values ranging from 0 to -20 are considered overbought and those from -80 to -100 are considered oversold. But often overbought does not mean it's the time to sell, or oversold does not mean it's the time to buy, because in strong trends the prices can remain in one range for an extended period of time. Traders should trade in the direction of the trend. During the periods of strong uptrend, traders can buy when the indicator falls to oversold values; and during strong downtrends, traders can short when the indicator shows overbought readings. Bullish and bearish divergences are also good signals, crossing of -50 from below or above.

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Bond unit investment trusts or bond UITs are one of the two types of UITs holding bonds in their portfolio. They invest in government and corporate bonds and shares are made available to the investors. The shares, termed units, are fixed in number and represent a small fixed portion of a large diversified portfolio. To know more, read 'Unit Investment Trusts or UITs'.

Different bond unit investment trusts have different portfolio combinations. Some invest in government bonds, some in corporate bonds and others in both. Some trusts invest their money in domestic bonds; others also invest in foreign bonds. Some invest more in tax-exempt bonds and others in taxable bonds. Thus the risk and return differs considerably and investors can choose whichever suits their goals.

Bond UITs have a fixed portfolio and a fixed maturity date ranging from just some months to over 25 years. The maturity date usually corresponds to the maturity date of the bonds invested. Payments are made monthly, quarterly or semi-annually. The principal is paid off to the investors as the bonds mature. Investors can also sell their units in secondary markets at market price prior to the bond UIT maturity date.

Bond UITs are good long-term investment options. The advantages include fixed and predictable income, some tax advantages, highly diversified investment, low minimum investment, no maintenance fees, etc. The downsides include: they are not suitable for short-term investments, no outperformance, and not suitable for investing the urgent money.

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The Week Ahead: Ben Bernanke's confirmation for a second term is losing some support by key Senators but may not be enough to block his second term approval this week. The Fed will hold a two day meeting starting Tuesday culminating in a interest rate decision on Wednesday afternoon. On Monday existing home sales will be released followed by Tuesday's Consumer Confidence report. Wedenesday brings new home sales data. Thursday look for the Durable Goods report. Friday the market gets a peak at the advanced Q4 GDP number for the economy.

Stocks to Watch: Apple Computer (AAPL) will announce earnings after the close on Monday and may introduce a tablet computer, but the stock did break below its 50 day moving average on increasing volume. Texas Instruments (TXN) will also announce at Monday's close as semiconductors have generally been weaker than other tech stocks. Harley Davidson (HOG) is searching for growth oversees in India as a year or more slowdown is expected before a turnaround. Exelon (EXC) declined on a Q4 earnings fall versus a year ago and worries that climate legislation could be in doubt.

Special Note: After reaching new 2010 highs last Tuesday, the Dow Industrials gave up 2 1/2 months worth of gains by Friday. This change of character was confirmed by the weekly MACD indicator as a crossover of the indicators two moving averages to the downside occurred for the first time since a buy signal crossover to the upside last March. The volatility should bring enhanced trading opportunities, but with a sell signal given rally's may be cut short abruptly as investors look to lock in profits from the past year.

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Bearish flag or bear flag is a bearish chart pattern formed in a strong bearish trend indicating the continuation of the downtrend after a small pause. This is considered as a highly reliable chart pattern and often formed in strong downtrends; in fact, one can often see more than one bear flag in a strong downtrend. Bearish flag pattern resembles bearish pennant chart formation, but here the price consolidation is between two parallel trendlines forming a rectangular flag shape as against converging to form a triangular or pennant shape.


A bear flag has two parts, a pole or mast, and a flag. The pole precedes the flag and is formed when the price sharply (near vertically) declines; usually because of some negative news/report or negative fundamentals. The flag is the price consolidation phase where the price moves within a short range. The flag can be either horizontal or slightly upwards; the second one more common. The formation then breaks out to continue the existing downtrend and the price is drawn to new lows.

Trading volume tends to decline during the formation of bearish flag pattern but the breakouts are noticeable with increase in trading volume. If there is no volume drop in flag formation or no volume rise in breakout, then the reliability of the pattern is greatly challenged. In addition, if the volume increases during flag formation rather than decreases, then there is also a chance of trend reversal. Traders can go short once the breakout is confirmed and the immediate price target should be the downward length of the pole from the breakout point.

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Bullish flag or bull flag is a bullish trend continuation chart pattern indicating the continuation of an existing bullish trend after a small pause. The pattern is a very reliable one and is highly welcomed by day traders and swing traders; in fact often one can see more than one bull flag in a strong uptrend. Bullish flag formation resembles bullish pennant chart pattern, but the difference is that here the price forms two parallel trendlines or a rectangular shape opposed to the price convergence in pennant formation.


The bullish flag formation has two components - a pole or mast, and the flag. The pole is formed when the price rises sharply to a new high; and is usually fundamentally triggered. The flag is the consolidation phase where the price rises and falls within a short range. The flags can be horizontal, formed because of strong support and resistance levels, but are often slightly declined. Then the prices breakout to continue the uptrend and the prices advance to new highs.

Volume tends to decline as the flag forms but the breakouts are noticeable with considerable rise in trading volume. If there is no significant volume increase in breakout, the reliability of the pattern is greatly challenged. The pattern usually stays for a short-term, and is usually completed within four weeks. Lengthier patterns are also less reliable. Traders can buy stocks once the prices breakout. The immediate target price can be the upward length of the pole from the breakout.

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The Week Ahead: A fourth quarter earnings report from J.P. Morgan still left lingering doubts about an economic recovery as losses on credit cards and mortgages deepened and may be an indicator of future bank earnings to come. Key reports to watch are Wednesday's Producer Price Index and Housing Starts as well as Thursday's Jobless Claims figure and the Leading Indicators for the economy.

Stocks to Watch: Look for the rail stocks to report earnings such as CSX Corp. (CSX) on Tuesday while Union Pacific (UNP), and Burlington Northern (BNI) report on Wednesday. IBM will also report numbers this week. Johnson and Johnson (JNJ) was hit with an expanded product recall and was also accused of paying bribes to help sales of its anti-psychotic medicine. Leap Wireless (LEAP) shot up 10% on 4 times normal volume on rumors that the company may be for sale. Interactive Data (IDC) is also reviewing alternatives as its stock rose 14%.

Special Note: Friday's downturn was especially harsh coming on the heels of an upbeat Intel earnings report. The selling was broad based as evidenced by the advance/decline ratio and up volume versus down volume. Furthermore, the high on Thursday was not confirmed by the Nasdaq, Dow Transports, Dow Utilities, or the broader based Value Line and DJ Wilshire 5000. Look for the uptrend line that started from last March to be breached at approximately the 10525 level. If so, this would be real evidence of a trend change in the market.

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Unit Investment Trusts or UITs are investment companies which buy and hold a portfolio of stocks or bonds, and make their shares, termed 'units', available to investors. Like closed ended funds, UITs have a fixed number of units and have low management fees as the shares are not redeemed or created often. Like mutual funds, UITs have a portfolio of diversified investments like many corporate bonds or stocks.

Unit investment trusts are offered to investors via initial public offerings or IPOs, and have a typical price of $1,000 per unit. They are managed by either a RIC (Regulated Investment Trust) or a grantor trust. Many UITs allow investors to buy and sell the shares in secondary markets after the IPO. The portfolio is already defined and fixed; there is no buying or selling of portfolio assets after the portfolio creation. Thus the investment objective is kept intact and the management costs are kept to low levels. The only exception is that some portfolio adjustments may arise because of corporate mergers, acquisitions and bankruptcy.

Unit investment trusts have a fixed life span. For bond UITs it is usually the maturity date of the bonds in the portfolio. On the termination date, the remaining portfolio is dissolved and paid to the unit holders according to the number of units they hold. The advantages of investing in UITs include diversification, low maintenance costs and fixed portfolio. Before choosing unit investment trusts, investors should carefully consider the portfolio assets and invest in one which most fulfils one's investment objectives.

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The market performances of the past two years have shown that the widely popular 'Decoupling Theory of Emerging Markets' has proved to be wrong. As per the theory, the emerging economies, especially the BRIC economies, have broadened and deepened enough so that they were insulated from US recession. But in reality many of these economies were worse hit than the US economy during the recession period. For more in this regard, read decoupling theory of emerging markets.

Experts now come up with many reasons for the failure of the decoupling theory.

1. The theory was a premature one; and even the basic assumption was not all that right. Perhaps the emerging markets have not yet broadened and deepened enough to decouple.
2. Although the GDP growth for these nations has shown increase recently and new trade relationships have been developed, the US is still their primary trading partner. So decoupling from the US economy is not easy.
3. The popularity of decoupling theory itself tempted many US and developed nation investors to invest hugely in emerging markets. When investors withdraw their money, these economies shrink.
4. The proponents of the theory neglected the effect of one other major well performing theory - the theory of globalization, where one economy is tightly coupled to another.

One possible reason for the popularity of the theory was the good performance of emerging markets during the first phase of US recession where the economic slowdown was entirely domestic because of the crash in the housing sector.

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Trading in choppy markets, where prices move up and down without any major trends, requires strategies different from those used while trading in trendy markets. The traditional buy and hold and long-term investment strategies may not be very profitable. To know more, read what is a choppy market?

• Buy-low sell-high (buy support and sell resistance) is often the best strategy for choppy markets. Prices often go up and down without forming any major trends; traders can better explore small price differences by having high position sizes and utilizing leverage. Short selling can also be profitable; traders can sell high and buy low.
• Trading with oscillator indicators can be a good strategy. Statistics shows that indicators like Relative Strength Index or RSI and Stochastic Oscillator offer better buy and sell signals in choppy markets than trending ones.
• Long term traders and investors should limit their trades and invest after proper screening. More trades means more trading cost and less profit. Traders should do proper fundamental analysis before investing as shifting from one hot stock to another won't be a profitable strategy.
• When trading in choppy markets, all types of traders should set small profit targets and strict stop-losses.

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Bearish pennant is a bearish trend continuation chart pattern showing continuation of a prevailing downtrend after a short-term trend continuation. This chart formation is very similar to bearish flag formation, the difference is that in pennant, the consolidation phase after the pole is triangular or pennant shapes as against flag or parallel shapes in flag formation. Bearish pennant formation also resembles symmetrical triangle formation, descending triangle formation and rising wedge formation; but this is a shorter term pattern.


Bearish pennant pattern is formed when there is a consolidation phase, because of indecision in existing downtrend. The trend lines converge to form a pennant shape which then breakout to continue the downtrend. Like flag formation, the volume tends to decrease as the pattern develops. The breakout is noticeable with great increase in volume. The duration of the pattern can be 1 to 3 weeks.

Traders can go short after the confirmation of breakout. The target price should be the height of the pole from the breakout price. Bearish pennant chart formation is less reliable when there is no significant change in volume as the pattern forms, no increase in volume on breakout or when the pattern takes more than 4 weeks to develop. There is also a chance of trend reversal if there is an increase in volume rather than a decrease.

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Past performance statistics and simplicity has made Dogs of the Dow a favorite investing strategy for many investors. It can be regarded as an investing strategy with many merits and some demerits. To know more, read Dogs of the Dow investing strategy.

Advantages of Dogs of the Dow

1. It is a very simple investing strategy that doesn't need much market knowledge, data mining and technical analysis.
2. It is a passive investing strategy that requires very little time.
3. The strategy has less downside risk and good reward potential as one is investing in low priced stocks that constitute one third of DJIA in terms of number.
4. It removes fear, greed and anxiety from investing.
5. The strategy is also tax savvy and helps investors to get good quarterly dividends.
6. The strategy offers very good diversification, especially when it constitutes below 25% of a portfolio.
7. It minimizes the trading costs involved in investing.
8. The past history of the strategy is very good as most of the time the strategy has managed to beat the average early Dow return.

Disadvantages of Dogs of the Dow

1. The past performance of the strategy does not guarantee future performance.
2. The strategy is based on dividend yield, which is not a standard indicator like P/E ratio or price-to-book ratio.
3. Although not yet noticed, companies can adjust their dividends to get into or get out of the Dogs list. This can harm the strategy goals.
4. The strategy does not suit active traders/investors and it demands great patience.
5. Market cycles and economic changes can affect the returns.
6. As the strategy involves buying and selling at year start, the investors are not likely to benefit fully from interim price benefits.

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The Week Ahead: A busy economic calendar could bring many cross currents to stock prices after an upward advance in week one of the new year. After Tuesday's Trade Balance numbers, the Fed's Beige Book will be released on Wednesday. Retail sales figures will be closely watched on Thursday as well as Business Inventories in the post holiday season. Friday precedes a three day holiday weekend, but ends with the CPI report, Industrial Production, Capacity Utilization, and the Univ. of Michigan Consumer Sentiment survey.

Stocks to Watch: Earnings reports begin this week with Alcoa (AA) on Monday. Steel stocks: US Steel (X ), Ak Steel (AKS), Nucor (NUE), and Worthington Ind. (WOR) continued to accelerate on bullish analyst calls for a pick up in production on firming prices. Palm Inc. (PALM) announced at the Consumer Electronics Show that it will sell smart phones through Verizon Wireless and shot up 11% on 3 times normal volume. Best Buy (BBY), despite a 9% increase in consumer sales, sold off as mostly lower profit margin items were purchased.

Special Note: Seasonal bullish forces maintained the upper hand in stocks out of the gate in 2010 with the S&P 500 leading the way with 12 of the last 14 days advancing. Wall Street analysts and strategists at Barron's and Bloomberg are once again unanimous on the prospects for an up year despite the 60-80% advances off the March '09 lows for the major indices. This kind of complacency is already factored into the Volatility Index (VIX) which has already entered a major area of support meaning the risk for downside volatility is high.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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Choppy market is a market condition devoid of any clear direction or trend. The prices move up and down without forming any major trends. Choppy market is a term derived from the phrase choppy seas where the waves prevent the boats from moving large distances in a direction. Choppy markets can be formed due to many reasons like lack of any significant news or economic development, no significant changes in international relationships, stable politics/economy/rates/growths/etc.

Choppy markets usually occur after an extended bullish or bearish trend, and the prices remain on their high or low levels for an extended period of time without moving significantly higher or lower. The period of a choppy market can be from just a few weeks to even years. The phenomenon is more evident in specific sectors or stocks than a broad market.

Choppy markets are not the best times for investors and less-experienced traders to profit from the market; but are very good occasions for active traders who buy lower and sell high. The trading volume, the highest high, lowest low, day highs and lows, daily price ranges, etc can be used to find a good trading strategy. Choppy markets are also good for automated trading and for using various trading indicators. The lack of any significant trend can also help beginners to better educate themselves and test their trading strategies.

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Ladder bottom is a bullish trend-reversal pattern indicating the reversal of the existing downtrend. It is a five candlestick pattern which is somewhat similar to bullish concealing baby swallow pattern. Bullish ladder bottom is a moderately reliable pattern.



The requirements for the bullish ladder bottom pattern include,

• The pattern should be formed at the bottom of a significant downtrend.
• The first three days are noticeable with three long bearish (black/colored) candlesticks which close below the previous candlesticks. This formation is identical to three black crows candlestick pattern.
• The fourth day is also bearish with a small real-body and long upper shadow; it is an inverted hammer candlestick.
• The fifth day is a bullish day noticeable with a long bullish (white/colorless) candlestick which opens above the real-body of the fourth day candlestick.

Ladder bottom candlestick formation occurs when bears lose control over the existing downtrend. The bearish candlestick on the first three days indicates that the bears are controlling the market but the inverted hammer on the fourth day indicates that shorts are covering their positions and the trend is getting weak. The bullish candlestick on the fifth day indicates (a) the bulls have gained control over the market and (b) the beginning of a new uptrend.

The reliability of the Bullish ladder bottom pattern increases with increase in trading volume of fifth trading day, with higher closing of the fifth day candlestick and with significant reversal of previous downtrend. Before taking a position, traders should confirm the trend reversal which can be a bullish candlestick, a gap above opening or higher close on the next trading day.

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Active traders can reduce and save their trading costs by slightly altering the entry and exit points, choosing the right order type and routing it to the right ECN. The strategy is widely followed by institutional traders; and retail traders can also practice that. Although the cost saving per trade can be low, it can add-up for a period.

Most of today's stock trading is done through Electronic Communication Networks or ECNs. Many ECNs offer credits to traders for adding liquidity and charge debit (fee) for removing liquidity. For example, ARCA offers 0.0023 ($2.3 for 1000 shares) credit for adding liquidity and the trading charge is 0.003 ($3 for 1000 shares) if the liquidity is removed. For a stock with ask and bid prices of $10.10 and $10.11 respectively, the trader gets credited when he sells at $10.11 or buys at $10.10 (for adding liquidity to the market), and debited when he sells at $10.10 and buys at $10.11. Now for a $5 per trade brokerage fee, the total charge for executing a trade is $2.7 ($5 - $2.3) if you received the ECN credit and is $8 ($5 + $3) if you have not received the ECN credit.

Different ECNs have different credit/debit structures and they also change it with time. Some ECNs do not charge for removing liquidity or they charge very low, making them ideal candidates if you want to trade by removing liquidity; and for trades that add liquidity you can use an ECN which offers high ECN credits. But focusing too much on ECN credits can harm your trades, especially on trending markets where traders cannot wait longer to 'get filled'. There are also many other trading fees which count in the total portfolio return.

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Dogs of the Dow is a very popular investing strategy that includes investing in 10 DJIA (Dow Johns Industrial Average) stocks with highest dividend yield at the start of a year. The portfolio is readjusted at the start of every year to include the 10 stocks with highest dividend yield; these stocks are known as the 'dogs'. Dogs of the Dow strategy was formulated in 1972 but was popularized by Michael O’Higgins in 1991 through his book 'Beating the Dow'.

Dogs of the Dow investing strategy aims at outperforming normal indexes like S&P 500 and Dow Johns itself. Looking at the history, most times the strategy outperformed the indexes by a healthy average. The period from 1973 to 1996 was most successful, when the dogs outperformed Dow by around 6%. The fact that DJIA is comprised of 30 well established and respected companies of the world and you are investing in 10 cheapest stocks among them makes this a sound investing strategy with reduced downside risk.

Dogs of the Dow is a very passive investing strategy; it can take may be one or two hours to invest and to make portfolio adjustments. The strategy also takes out technical analysis, emotion and market timing from the equation. The stocks to be invested are already defined and one just has to follow the rules. But like everything else, the past performance of the strategy does not guarantee future benefits. The strategy is so popular now that it places high pressure on those 10 dogs involved to do better.

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The Week Ahead: The new year opens with the Nasdaq leading the way with a 43.89% gain in 09' led by Amazon.Com, Apple Computer, and Google. The S&P 500 gained 23.45% and the Dow Industrials returned 18.82%. Economic statistics generally have improved from year ago levels after the federal stimulus money with the exception being the continued downtrend in the employment numbers. Construction jobs have been hit hardest and likely will still be problematic in 2010. This Friday's Employment report could be the first positive reading since late in 2007.

Stocks to Watch: Conagra (CAG) is suing Dean Foods (DF) for trademark infringements, but neither stock was impacted much as both have had steady chart patterns for the past year. YRC Worldwide (YRCW), a trucking company announced a successful debt for equity exchange, but this is considered dilutive as the stock continued its poor performance. Wimm Bill Dann Foods (WBD), a Russian dairy products company was upgraded by CitiGroup despite its huge run-up the past 13 months. Intelli-Check (IDN) rallied strongly on prospects for its defense ID device.

Special Note: The January barometer will be in focus this month. Basically as January goes so goes the year, but it did not work in '09. A better predictor could be the decennial pattern when the last year of a decade rallies. Typically the first year of the new decade is a down year as evidenced by 7 of the past 11 decades in the Dow Industrials. Even more interesting is that of the last 11 decades, the first year or '0' year prices have exceeded the low of the '9' year 8 times or 73% of the time going back to 1900. It last occurred in 1980. Is it due to happen in 2010?

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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