Making Money Alert
The Great Wall Street Fear Kill
02/20/2013
The fear is gone on Wall Street.
Apparently, there is nothing to worry about; stocks will no longer go down, and the lion will now sleep with the lamb.
I jest, of course, but if you read the financial press these days, or if you listen to the plethora of pumped-up pundits extolling the virtue of equities, you might come away with the idea that all is bliss in stock land. A case in point is a recent Wall Street Journal article titled, “Investors Finally Shed Fears.”
In the piece, we find out, “Individual investors are doing more stock trading. Mutual-fund companies are seeing money being put to work in both stocks and bonds. Advisers say they are hearing from investors who had been hunkered down for years but now are feeling more comfortable that another big meltdown isn’t lurking around the corner.”
The article does go on to point out that greed hasn’t completely replaced fear as Wall Street’s governing emotion, but quickly thereafter it goes into a litany of metrics confirming the great Wall Street fear kill.
Some of those metrics include the seven-week winning streak for the S&P 500 index, which is up 6.6% so far in this young 2013. Then there’s the Dow, which is up 6.7% year to date, and now trades above 14,000 and near its highest level ever.
Then there is the lack of fear, as measured by the “fear index” itself, the CBOE Volatility Index, which is better known as the VIX. The measure of volatility on S&P 500 options has languished below the 15 mark for all of 2013, and the following chart of the VIX shows the volatility index at its lowest point in years. The latest stint below 15 is the longest such stretch under this technically and psychologically significant level since early 2007.
Indeed, judging by these metrics, fear has been swatted down and tossed in the trash by investors, and that means more buying to come -- until, of course, it doesn’t.
In recent weeks, I’ve said that the beginning of 2013 reminds me of 2008; when everyone was über bullish on stocks, and nobody thought the major averages would ever drop significantly. Well, we know that notion was faulty, and we know that anyone saying stocks can’t go down again is living a pipedream, too.
I think now, more than ever, investors need to cultivate a strong fear instinct, because it is precisely when there is no fear in the markets that things tend to drop very, very fast. Will there be more buying in 2013? Quite possibly, but we also could witness a serious sell-off if we see a continuation of the downbeat economic data lurking behind the bullish curtain.
Poor revenues from retail giant WalMart (WMT), higher gasoline prices, sluggish growth in Europe, and weak U.S. gross domestic product (GDP) and employment growth are just some of the reasons that could put fear back on Wall Street’s front burner and heat things up significantly for all of those fearless bulls rushing back into stocks.
To find out when it’s time to get back into equities once the current greed and fear cycle tempers, check out my Successful Investing investment newsletter today.
ETF Talk: Homebuilder Fund Offers Growth Opportunity
The last several weeks of ETF Talks have taken turns focusing on different segments of the housing market as it heads into what is expected to be a very good year for the sector. Today, we round out our coverage of exchange-traded funds (ETFs) which capitalize on the rebound by offering a pick which combines multiple sectors in the domain of housing. PowerShares Dynamic Building & Construction (PKB) may seem a lot like previous ETF Talk pick SPDR S&P Homebuilders (XHB), but, while XHB was simply tied to a general housing sector index, PKB is more directly involved in the nitty-gritty of the sector by investing in engineering, building and constructing companies.
This non-diversified fund seeks results that, before fees and expenses, correspond generally to the price and yield of the Dynamic Building & Construction IntellidexSM Index. That index is made up of stock from 30 U.S. building and construction companies, providing construction and engineering services for building and remodeling residential properties, commercial or industrial buildings.
PKB is demonstrating remarkable growth: the fund is up 7.45% this year, following a whopping 42.70% gain in 2012. In addition to gains to be made from capital appreciation, PKB also offers a yield of 0.49%. And as the housing rebound looks to continue, especially as the Fed remains committed to its easy-money policies, strong gains look to be not just in the rear-view mirror, but on the road ahead as well.
PKB has its holdings invested in three different sectors. The industrials sector leads the way, with 48.37% of the fund’s assets, though the consumer cyclical sector is not far behind at 35.18%. The basic materials sector brings up the rear at 16.44%. As for individual companies, PKB’s top ten holdings total 45.25% of its assets. The top five of these holdings each possess around 5% of the fund’s assets: PulteGroup, Inc., 5.13%; KBR, Inc., 5.11%; Quanta Services, Inc., 5.01%; Mohawk Industries, Inc., 4.99%; and NVR, Inc., 4.85%.
Even if the housing rebound does not wind up as robust as expectations, due to slowing housing starts or any other reason, keep in mind that PKB also invests in remodeling, which is gaining popularity as a cheaper alternative to building entirely new homes. However, in light of the aforementioned Fed policies, as well as high expectations and optimism regarding the housing rebound, it is unlikely PKB will rely solely on this “Plan B.” Instead, this ETF, and those who invest in it, can profit from both avenues.
Indeed, the Federal Open Market Committee this afternoon released minutes from its Jan. 30 meeting, and the central bank indicated that it will maintain its easy-money policies, which are helping the housing market’s recovery. The minutes stated, “Household spending and business fixed investment advanced, and the housing sector has shown further improvement.” That report shows no reason to think the housing recovery is slowing, despite the uncertainty about the federal government’s budget situation.
If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me by clicking here. You just may see your question answered in a future ETF Talk.
How Hot American Girls Can Make You Rich
Are you embarrassed about “reading” the Sports Illustrated “Swimsuit Issue”? Well, don’t be. According to my friend and colleague Jim Woods, looking at scantily clad supermodels is basically just a little stock research. I’ll let Jim explain here in his latest Eagle Daily Investor article.
How Hot American Girls Can Make You Rich
By Jim Woods
The new Sports Illustrated Swimsuit Issue hit newsstands last week, and gracing the cover with her curvaceous cuteness is the über-sexy Kate Upton. This is the second consecutive year that the all-American “hottie” has appeared on the magazine’s most widely “read” issue, much to the delight of gentlemen around the world.
Now, as much as I’d like to continue writing about Upton’s ultra-gorgeous appearance, this site is all about money and investing, so I am going to have to keep my commentary to the subjects at hand. Fortunately, there is a connection between stocks and the SI Swimsuit Issue. By following that connection, you actually could put some money in your pocket.
A few years ago, money management and research firm Bespoke Investment Group crunched a few seemingly unlikely numbers and came up with something called the Sports Illustrated Swimsuit Issue Indicator. According to this indicator, U.S. equity markets tend to perform better in years when an American girl is on the cover of the magazine.
Yes, this relationship might sound a little silly, but the numbers certainly confirm the statistical efficacy of the indicator. According to Bespoke, since 1978, an American has appeared on the cover of the annual issue in 18 different years. A little research confirms that the total average return of the S&P 500 Index during those years is a gain of 14.4%, with positive returns 88.9% of the time.
During the 17 years where a non-American model appeared on the cover, the S&P 500 averaged a total return of 10.8% with positive returns 76.5% of the time. The one big anomaly in the indicator is 2008, when American supermodel Marisa Miller was on the cover. That year, the S&P 500 sank 38.5%. Save for that disastrous year, the relative outperformance of the American beauties would have been much bigger.
As for Kate Upton, well, the model already is a big hit with Wall Street. Last year, when Upton made her debut on the cover, the S&P 500 registered a 16% total return. If the market smiles on Kate again this year, then investors who buy into the hot-American-girl theory could end up enjoying some pretty hot gains, too.
But hey, whatever happens with the markets, it never hurts to appreciate the beauties in the pages of the Swimsuit Issue. So, I say embrace your birthright as an American male (or female) and get yourself a copy now, before the issue sells out.
Oh, and it probably wouldn’t hurt to be long stocks right now, given the Fed-fueled bull market.
On Strength and Repair
“The world breaks everyone, and afterward, some are strong at the broken places.”
--Ernest Hemingway
If you’re human, you’re going to experience sorrow, sadness and heartbreak. But it’s how you emerge from these that determine your existence. Often, coming out stronger in the broken places is the difference between being happy, and living a life of pain.
To read my e-letter from last week’s Eagle Daily Investor, please click here. I also invite you to comment about my column in the space provided below my Eagle Daily Investor commentary.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.
To the best within us,
Doug Fabian