Making Money Alert
A Nice Week So Far, But Is Trouble Ahead?
08/17/2006
So far it's been a stellar week for equities. All three major market indices -- the Dow, S&P 500 and Nasdaq Composite -- have posted great gains. Monday's surge in stocks was due mostly to news of a cease-fire agreement between Israel and Lebanon. The positive geopolitical developments then were followed by two days of great news on the inflation front.
In fact, a bevy of economic reports released in the past two days have all but assured Wall Street that the Federal Reserve won't be hiking interest rates when it meets again in September. Tuesday's Producer Price Index (PPI) number, which measures inflation at the wholesale level, fell 0.3% in July. It was that index's first decline since October.
This morning, we had another tame inflation report. This report focused on consumer prices. The core Consumer Price Index (CPI) -- the measure that excludes the volatile food and energy sectors -- was up just 0.2%. Most economists were expecting that number to rise by at least 0.3%. Both of these reports were cause for celebration on Wall Street, as both stocks and bonds rallied on the theory that the Fed will continue pushing the pause button well beyond September.
The fairly calm inflation data was accompanied by alarming numbers on the housing front. According to the Commerce Department, the pace of activity in building new homes fell in July to the lowest level in nearly two years. That's a red flag that this economy is cooling off fast. Housing starts, the number that tracks the nation's rate of new home construction, fell 2.5% last month to 1.8 million on a seasonally adjusted annual basis. That dip was the fifth decline in housing starts in the last six months, and the lowest total number since November 2004.
If you are a regular listener to my radio show, you know that I have been opining for some time about the coming fallout of the real estate market. I recently saw a statistic that in Newport Beach, Calif., where I reside, there has been an 118% increase in foreclosures over the last 12 months. In Orange County, where Newport Beach is located, there has been an 83% increase in foreclosures. If that weren't enough, real estate industry bellwethers Countrywide and Toll Brothers announced that they are expecting the housing markets to get much worse in the near future.
This slowdown in housing affects consumers through a psychological property known as the "inverse wealth effect." When people start to see the prices of houses declining, interest rates rising, and general market uncertainty around them, they feel less wealthy and less inclined to spend money.
Now, I don't want to rain on this week's market's parade, but I do think that the housing data could cause a lot of damage in the months ahead. Will this mean trouble ahead for the stock market? We'll find out soon. I just want to caution my Alert readers to not get sucked in by the wave of buying here in equities. Be cautious with your capital right now, as tame inflation data often is accompanied by a cooling economy. And a cool economy can mean a cold return in the equities.
ETF STRATEGIES FOR AN UNCERTAIN MARKET: PART V -- USING INDEX ETFS TO "BUY THE MARKET"
We've now arrived at the final installment of our five-part series on Exchange Traded Fund (ETF) strategies for an uncertain market. This week the focus is about using index ETFs to essentially "buy the market." One of the best things about ETFs is that they allow you to get exposure to various parts of the market, including the major market indices.
ETFs started becoming popular during the 1990s, when investors who wanted exposure to the tech sector realized that it was a lot easier, and a lot cheaper, to buy the Nasdaq 100 via the QQQQ than it was to buy into a mutual fund offering the same exposure.
Investors now had a vehicle that they could use to take advantage of the tech boom. That investment vehicle was transparent, objectively managed, easy to trade and had a minute expense ratio when compared to traditional tech mutual funds. It's no wonder that the QQQQ, or Qs as they are commonly referred to, are one of the most heavily traded securities on the market today.
As you can see by the chart above, the Qs have been in a steep decline since early May. However, since mid-July the tech-heavy index (which includes the largest 100 stocks traded on the Nasdaq Composite) has trended higher. In fact, early this week the Qs broke above their 50-day moving average and are on their way toward the 200-day average. If you want exposure to the tech sector without having to pick individual stocks or without having to pay the high fees traditional mutual funds levy, the best way I know of is to buy the Qs.
Another great way to "buy the market" using ETFs is by getting exposure to perhaps the best measure of overall market strength, the S&P 500 Index. Through the S&P 500 SPDRs (SPY), commonly know as "spiders," investors can basically own the 500 largest publicly traded companies in one easy, convenient and inexpensive ETF.
SPY is a proxy for the health of the entire stock market. If you suspect the market at large is headed higher, one of the easiest ways to take advantage of that suspicion is through an allocation to the Spiders. Right now, the SPY is trading above both short- and long-term moving averages. As the S&P 500 index approaches the 1300 mark, it could mean the beginning of a sustained uptrend in stocks.
For investors who like to expand their exposure to companies with a little less bulk than just the largest 100 Nasdaq stocks or the 500 biggest public companies, there's an ETF tailor made for you. It's the iShares Russell 2000 Index (IWM). This ETF allows you to buy into the small-capitalization sector of the U.S. equity market.
IWM invests in approximately 2,000 of the smallest capitalization-weighted companies in the Russell 3000 index. By nature, this index tends to be much more volatile than both the Qs and the Spiders. You can experience a lot more downside when investing in these smaller stocks, but you also can get a much bigger push to the upside as these stocks will tend to move faster than their larger brethren.
At my Successful Investing service, we are watching all three of these ETFs very closely. In fact, the rebound in stocks during the past two days has pushed these three barometers of the market to attractive levels. We currently don't have an allocation to these ETFs but the market is close to giving us the go ahead to get back into equities. When the time is right, you can bet that we'll be recommending you buy the market via these three index ETFs.
Don't miss out on our next Buy signal. Find out when, and how, we'll use ETFs to take advantage of the next opportunity in stocks by clicking here:
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OF TIME AND MEMORY
"Time moves in one direction, memory in another."
—William Gibson
It's easy for us to fall into a trap when it comes to our investing decisions. Often, we think about what we should have done, or the profits we could have made if we only would have bought a certain stock way back when. Don't get caught in the trap of regret when it comes to managing your money. As Gibson says, time moves in a different direction than memory. If you want to succeed in the here and now, you've got to take action in the here and now. Don't hesitate any longer. Get your financial house in order before it's too late.
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 Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.