Making Money Alert
Bear Market Survival Guide, Part IV
11/09/2011
Today’s action in stocks that caused the market to plunge more than 3.5% across the board midway through the trading session highlights the need for our next installment in our Bear Market Survival Guide series. After two days of solid buying, Wednesday’s plunge confirmed that there remains a lot of worry out there -- worry that could morph into a full-blown bear down the road.
The latest market boogeyman is yet more trouble out of Europe. But this time, the trouble spot is not Greece, but Italy. The debt issues in Italy have forced Prime Minister Silvio Berlusconi to announce he’d resign soon, as the unctuous Italian leader failed to garner enough support from parliament to stay in power. Of course, the real fiscal issue at hand plaguing markets today is the spike in Italian bond yields.
The nation’s 10-year bond yield shot above the 7% level, a mark that’s widely deemed as unsustainable. The sell-off reflects grave concern among investors that they may never recoup the money lent to the troubled nation.
In a recent discussion on my Monday Morning Market Outlook audio podcast, I discussed in detail why the Italian situation is so troubling to the markets. To listen, simply click on the link above.
In the chart here of the S&P 500 Index, we can see from a technical perspective that the recent rally has been turned back at the 200-day moving average once again. The failure of stocks to break above the 200-day average for any significant time period has me even more concerned about the potential for another bear market. As a result, we must be prepared.
So far in this series, we’ve taken a look at the technical, fundamental and psychological reasons why we could be headed for a bear market. We’ve also looked at the inverse equity exchange-traded funds (ETF) that we can use to keep the profits coming, even while the bulls are on the run.
This week, I want to take a look at another group of ETFs that can be used while money is flowing out of stocks, and that’s currency funds.
In times of stress, traders and big money investors often move capital into the safety of currencies. Here we are talking about not just the U.S. dollar, but also the Japanese yen and Swiss franc. Taking advantage of the safe-haven appeal of the U.S. currency can be done with the PowerShares DB U.S. Dollar Bullish (UUP), an ETF that rises as the value of the greenback moves higher vs. rival foreign currencies.
In today’s session, the value of the euro was crushed, as investors poured money into the relative safety of what still is considered the safest currency bet in town -- the U.S. dollar.
Other fiscally stable currencies such as the yen and Swiss franc can be played with ETFs, namely the Rydex CurrencyShares Japan (FXY) and the Rydex CurrencyShares Swiss Franc (FXF). Often seen as flight-to-quality currency plays, these funds also tend to rise when capital runs away from stocks and into currencies.
These currency funds are yet another weapon in your Bear Market Survival Guide tool kit, so get to know them well. If the bear roars, you’ll be able to quiet him down with currencies.