Making Money Alert
A Spike Here, A Spike There
07/30/2008
The wild ride the market has taken us on for the past couple of weeks illustrates beautifully the kind of volatility inherent in a bear market.
Stocks want to go up, and the market wants to rally, but the negatives baked into the cake right now are just too strong for stocks to gather the kind of escape velocity they need in order to make a true break to the upside.
What we are seeing now, and what we are likely to see for a few weeks longer, is a spike here, and a spike there -- followed by a continued push to the downside.
Let's take a look at the chart below of the S&P 500.
As you can see, the market has jumped off of the low it made in mid-July. But take a look at the key levels we need to break above to insure a rally is for real. I've highlighted both of these levels in blue, one at 1300 one at 1350.
I think we could see this market rally in the short term to about 1300, and then the most likely scenario from there is a pullback. But if the market can make the move up above 1350 and hold that level for at least a little while, we could be looking at the start of a new bull market.
My suspicions, along with my reading of the charts, tell me we are in for more market spikes higher on any smidgeon of good news. Then, the most likely scenario is a sustained move to the downside such as we had in mid-May and early January.
The question now for you, the individual investor, is how do you take advantage of what I think will be more sharp moves to the downside?
The answer is to employ a little short-sided thinking.
Short-Sided Thinking
Making money in the market is not just a matter of buying a good stock, mutual fund or exchange-traded fund (ETF) and then watching it go higher. These days, you're likely to have more success by investing on the short side of the equity ledger.
Now, when I talk about investing on the short side, I am not suggesting that you short stocks in the conventional manner. I do not want you to borrow shares of XYZ Corp. from your broker and then hope the stock goes down so you can replace them in the open market later for a profit. That's the old-school method of shorting.
These days we are blessed with ETFs, and in recent years there's been a growing number of inverse, or short, ETFs designed to move in the opposite direction of not only the major market indices, but also of specific market sectors.
The table below shows just how many great options you have to short this market with ETFs.
The funds listed here are "Ultra" funds, which mean they move twice the inverse of their respective index. For example, the first fund listed here, the ProShares UltraShort QQQ (QID), moves twice the inverse of the NASDAQ 100 index. That means if the NASDAQ 100 falls 2%, QID will rise 4%.
In a tough market environment, one that's constantly characterized by a consistent downtrend in equities, it behooves you to think about how to make money on the short side.
One note of caution here is that investing on the short side is not for the faint of heart, nor is it for the inexperienced investor. If you do want to buy some short ETFs, then I recommend that you employ the following rules:
1. Only use a small percentage of your overall investment portfolio to go short. Depending on your risk tolerance, you'll want to keep your short ETF purchases to between 10-25% of your total investment capital. Please do not risk the bulk of your portfolio on short, leveraged ETFs.
2. Define your risk. When investing short, you must employ strict stop losses and you must always protect yourself from a short position going against you. We have seen a lot of volatility in these ultra-short sectors, and although the trend so far in 2008 has been conducive to these funds, it's by no means a safe or easy way to make a dollar.
3. Cover your short positions when the market is going your way, and not when it decides to go against you. If you are short and the market is having a big down day, then that's the day to sell your position. When you are short, you want to sell into strength, and strength in a short position is when the major market averages all are substantially lower.
If you're looking to employ a little short-sided thinking in your portfolio, then I invite you to check out my ETF Trader advisory service.
Many of our most profitable moves have come in leveraged short ETFs, and if my thesis is correct about more downside before the energy runs out of this market storm, the short side of the ledger is where the big money is going to be made.
To find out more about short ETFs -- and how to use them with my ETF Trader service, click here.
ETF Talk: Mining the Middle East for Dividends
When the stock market is trending downward, it is difficult to know what to do. Amid the uncertainty is the proven benefit of owning dividend-paying stocks. Sure, the share prices of such stocks and equity ETFs can fall, but the dividend payments continue to generate income in both good and bad times.
Before I expound further about dividend-paying ETFs, remember to e-mail me if you have any questions about ETFs that you'd like me to answer. To e-mail me a question, click here and I will try to address it in a future version of ETF Talk.
Despite the current market gyrations, one intriguing new ETF that offers exposure to a growth-oriented foreign market and dividend income is the WisdomTree Middle East Dividend Fund (GULF). The new ETF began trading on July 16. The fund is based on the performance of the WisdomTree Middle East Dividend Index.
GULF gives investors exposure to approximately 70 dividend-paying companies listed in Bahrain, Egypt, Jordan, Kuwait, Morocco, Oman, Qatar and the United Arab Emirates. If you're worried that oil prices will resume their upward trajectory after their recent pullback, the countries featured in the GULF ETF should benefit economically from such a trend. Oil certainly is a key commodity for Middle Eastern countries and their economies but this fund is not dependent on the performance of just one sector. In fact, its biggest exposure is to Middle Eastern banks and other financial stocks. That sector accounted for 49.61% of the fund's assets as of July 29.
The fund's second- and third-largest sector holdings are telecommunications services and industrials, respectively. Telecommunications companies drew 24.56% of the fund's assets as of July 29, while industrials took in 11.37%. Clearly, this fund is diversified in ways that focus on the region's overall growth opportunities and the kinds of companies that will benefit from continued Gross Domestic Product (GDP) gains.
Kuwait is the nation that has attracted the most investment dollars of GULF. The fund has put 27.73% of its holdings into Kuwaiti companies, while the United Arab Emirates, with 18.12%, and Egypt, with 12.69%, round out the top three countries where GULF has placed its investment funds.
I am not recommending this new fund right now, as it still is trying to build its trading volume to the threshold of 100,000 shares a day that I like to see before pursuing such an opportunity. You may want to hold off on investing in GULF until its trading volume increases, and until we see its price performance for the first four-to-six weeks.
Still, I think the idea of mining for dividends in the Middle East is sound, and I will definitely be keeping a close watch on GULF for all of us.
Puckering Up for a Lemon Chat
Want to hear the latest update on my Lemon List, the list of America's worst-performing mutual funds?
Well, now you can take a listen to my chat with Fabian Wealth Strategies Vice President David Fabian, who presented me with the highlights (or should I say low lights) of some of the most egregious mutual fund offenders in what has been a very tough second-quarter.
To listen in on my chat with David, click here.
If you own a mutual fund, or if you were planning on buying a mutual fund anytime soon, I urge you to listen to this segment today. A little chat under the lemon tree could save you from a very sour-tasting portfolio down the road.
I Left My Heart in San Francisco
It's almost time for me to make my annual pilgrimage to one of the greatest cities on the planet -- gorgeous San Francisco, Calif., a place where hearts are lost and sweaters are a must even in the summer.
I will be in "The City,"as the locals call it (don't call it "Frisco"or the locals will spot you right off as a mere pathetic tourist), for The Money Show, which begins on Aug. 7 and runs through Aug. 10.
If you'd like to catch me this year, here is a quick look at my San Francisco Money Show speaking schedule.
Friday, Aug. 8, 8:00 a.m. - 8:45 a.m., "ETF Strategies in a Difficult Market"
Friday, Aug. 8, 2:30 p.m. - 6:30 p.m., "Structuring a Portfolio for Income and Safety"
Saturday, Aug. 9, 2:15 p.m. - 3:00 p.m., "Seven Rules of Success for ETF Investors"
This year's Money Show includes more than 50 world-class experts in more than 150 FREE workshops. And, this year's show will be held at the newly remodeled San Francisco Marriott, which I must say looks fantastic.
To attend the show, just call 800.970.4355 and mention priority code #009612 or visit The Money Show San Francisco's Web site to register FREE today!
The Fabian Guide to Managing Risk
Want to find out how to manage risk in this market? With my FREE special report, "The Successful Investor's Guide to Managing Risk," you'll be able to do just that.
In this FREE report you'll find out about the six threats to your retirement nest egg -- and what you can do to mitigate those threats.
Topics in this report include:
- How to deal with faulty investment advice
- How to inoculate your portfolio from a bear market
- How to avoid risky, high-yield securities
- How to stop paying unnecessary advisor fees
To read this FREE report, simply click here.
Guaranteed Monthly Income For Life? You Betcha! 2
On Saturday, July 12, I held the latest installment of my retirement income conference call. Big thanks to all of you who called in with your great questions, and big apologies to those who couldn't listen live because the event had reached capacity.
Now, if you are one of those who couldn't get through, or if you weren't available to attend the call that day, don't fret. You can hear a FREE replay of the call right now, by clicking here.
In this call, I discuss the many tools and vehicles you can use to produce a monthly income stream, and I show you how some products can offer you a 5% to 6% GUARANTEED return without losing control of your investments. These products are outstanding for taking a portion of your IRA or 401(k) and creating an income stream of $1,000, $2,000 or even $3,000 per month.
If you have an existing annuity and want to generate guaranteed income WITHOUT annuitizing your assets, then please listen to the replay of this informative discussion.
Remember, your assets will need to last you 20-30 years. You will need to create an income plan that will last as long as you do. We can help.
A "Tool" of Wisdom
Something kinda sad about
The way that things have come to be
Desensitized to everything
What became of subtlety?
How can this mean anything to me?
If I really don't feel anything at all?--Tool, "Stinkfest"
Today's quote from the rock band Tool may seem somewhat dark, but if you look a little closer you'll find it has a direct relationship to investor psychology. You see, when the market is in decline for months at a time investors tend to become desensitized to their own losses. Once this happens, your money stops meaning anything to you and you just stop feeling the pain. To this I say; wake up! Don't let your losses desensitize you to good judgment. Take control of your money now, before your psychology turns to the dark side.