Sometimes the best way to see where you are going is to look where you have been. Of course every financial commentator always covers his backside by telling you “past performance is not an indication of future returns,” just as he whips out charts of historic action.

With the second quarter in the history books, we can learn who were the winners and the losers and work to uncover any important patterns or indicators. The results may be surprising.

I will start with the top three gainers, all listed on the Nasdaq exchange.

Dendreon (NASDAQ:DNDN) wins top honors with a quarterly gain of 495%. The biotech company that was trading for just $2.55 per share in March is now going for close to $24 today after stretching as high as $27.40 in recent weeks. The surge came thanks to positive news from the company’s prostate-fighter Provenge.

The exchange’s next top gainer is MAP Pharmaceuticals (NASDAQ:MAPP) with quarterly gains of 481%. Its wealth-generating propensity came on the news that the company’s migraine drug met four critical endpoints. Most of the company’s movement came last month when shares soared from the $3 range to a high of close to $14.

Finally, the third-place winner, with gains of 340% is Fuqi International (NASDAQ:FUQI), a precious metal jeweler in China. As the country’s economy showed signs of strength, Fuqi surged from $3.31 to close to $20 per share.

Two drug companies and a gold player in the winners. If you visit TFN with any regularity, you are not surprised by the news.

How about the losers?

Earning the Nasdaq’s worst-performance award is Star Scientific (NASDAQ:STSI), a manufacturer of “less-deadly” tobacco products.

Its precipitous decline came after word broke the company lost a patent lawsuit against a behemoth competitor, Reynolds America. In just the first half of June, shares of the company dropped from over $5 to just north of a buck a share. In all, the company lost 79% of its value during the year’s second quarter.

Trailing closely is yet another biopharm player, Anadys Pharmaceutical (NASDAQ:ANDS). When word the company’s Hepatitis C treatments were not up to par hit the Street, shares began shedding value like a dog shakes off a heavy rain.

The company lost 73% of its value in the past three months.

Rounding out the Nasdaq’s losers is yet another biotech, Sequenom (NASDAQ:SQNM). It lost 72% of its share price after it announced “employee mishandling” of data made Down syndrome testing results unreliable.

Two more examples of the volatility associated with the speculative biotech industry. It is proof one news event can make or break these fast-moving companies, sometimes permanently.

Pay attention here

Finally, after compiling a list of losers for the NYSE, it is obvious those leveraged short ETFs are some of the most dangerous investment tools out there. Far worse than the default swaps so many investors love to hate.

When the markets surged from their March lows, the last investment you wanted in your portfolio was the Direxion Financial Bear 3X Short (NYSE:FAZ). Designed to use leverage to create gains tripling an intraday drop in the market, the ETF created losses of 77% for the folks that unwisely bought into the fund with a buy-and-hold strategy.

This is perfect proof that these funds are dangerous when not used properly and it exemplifies why no investor should hold a leveraged short position for more than a few hours, let alone an entire quarter.

As the math shows, even if you get the trend right, you can still lose an awful lot of money.

The last three months were filled with stories of great gains and strong losses. Most intriguing is the gap between so many biotech companies.

Pick the right ones (which we appear to be quite good at here at TFN) and you can make out like a bandit. Go with the wrong one and, well, the numbers speak for themselves.

For my take on what the current quarter’s list of winners and losers will look like, click here.

Source: The Second Quarter’s Biggest Winners… and Losers

I ask because moves like this trigger a spike in volatility because the risk of reversal increases. In turn, this throws up a conundrum for many investors – and hamstrings them from making the correct decision.

For example, after a strong move higher, it’s wise to lighten up on a few positions in advance of a pullback, especially the non-core positions. But invariably, the market continues to rise. Similarly, you may use a fall as a chance to buy some undervalued stocks at a discount. But what if the market keeps heading south?

It’s at this point that panic can set in.

Did I sell/buy too soon? Did I sell/buy too much? Stock market uncertainty can cause some serious stress. So how do you bet both for and against the market – specifically on individual shares – in order to alleviate some of the anxiety of being out of the market completely?

The answer is below…

Exposure To An Entire Market Through One Simple Investment

There are several vehicles that allow you to bet on the market’s direction.

Take ETFs (exchange-traded funds), for example. One of the fastest-growing areas of the market in recent years, these funds allow you to participate in a sector, industry, currency, country, etc. because they hold a specific basket of stocks that represent them.

In the financial sector, this includes the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ). These funds allow you to participate in the direction of financial stocks to the tune of three times the move of the underlying shares.

So if a normal financial ETF were to move by 2% in one day, FAS or FAZ would move by 6%. But here’s the rub: This is for day-traders only. If these ETFs really were triple up and triple down, you could buy 1,000 share of each and retire, since one would eventually go to close to zero, while the other would soar in value. Each ETF is reset every morning and the gains or losses are dependent on the trading action for that day.

There is a better way…

Unsure Of A Stock’s Direction? “Straddle” It…

Since practically no one can predict the market’s direction with 100% accuracy all the time, it makes sense to employ a strategy that allows you to hedge against the uncertainty.

You can do that through an options “straddle” play.

A straddle is when you make a bet on both the market’s potential upside and downside. The goal is for one side of the trade to move substantially higher, offsetting the losses from the other side of the trade.

For example, let’s say you’re looking at a way to play US Bancorp (NYSE: USB). The stock’s 52-week high is $42, while the 52-week low is $8, and the current price is around $19. So for the sake of this example, let’s use the $20 option.

The Upside Scenario:

• The January 2010 $20 call option is trading for $3.
• The January 2010 $20 put option is trading for $4.
• If USB hits $30, you’d make a $7 net profit on the trade.
• That’s because the put option would be $1, meaning you’d lose $3 on it. But the call option would rise to about $7, meaning you’d make $4 profit on it and offset the loss on the put.

If USB were to reach its 52-week high, you’d lose your premium on the $4 put option premium… but make $19 on your call option ($22 minus $3 = $19).

The Downside Scenario:

If USB moves to the downside, the equation is the opposite.

• If USB moves to $10, the put option would be worth $10 ($20 strike minus $10 price) and your net profit would be $6 ($10 current value minus $4 invested).
• The call option would be worth $3 at most, so the $6 would more than offset the loss.

A straddle is best used when you are unsure which direction the stock/market will move… but you know that whether it’s up or down, it will be a strong move when it happens.

Next week, I’ll tackle the Strangle trade.

Karim Rahemtulla

Source: Two Profitable Ways To Play Stock Market Uncertainty