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A Turning Point on the Horizon?

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02/07/2007

There's no doubt that this market's run in the final quarter of 2006 was remarkably strong. But some segments of the market -- particularly the NASDAQ 100 -- appear to have reached their resistance levels in late November. Let's take a look at the chart below, which represents the price movement of the NASDAQ 100 exchange-traded fund (ETF), the QQQQ.

We've already seen a trailing-off of sorts in the S&P 500 index. Save for a big one-day spike last week, which immediately was followed by a big plunge the next day, stocks that comprise this broad-market measure have seen more losing days than winning days lately -- a trend which can be seen clearly in the chart below.

As you can see, the sector brushed up against the $45 level in late November. Since then, it's slid down below $43 and broken back just slightly above the $45 resistance level. Basically, what we now are experiencing in the NASDAQ 100 -- as well as many other sectors -- is what's called a tight trading range.

Whenever we are "stuck" in a tight trading range for a significant period, such as roughly the last two months, a turning point usually is not far off the horizon. Markets by nature want to move either higher or lower and I think the direction we see during the next couple of weeks likely will set the tone for what's ahead during the next several months.

Right now, my Successful Investing advisory service is employing multiple sectors in our portfolio that are unequivocal on the issue of their bull market status. Rather than buying into sectors such as the QQQQ, which are on the fence about where they're headed, we have the flexibility, research and experience to ferret out the haves from the have-nots in this sideways market.

If you want to find out how to take advantage of these sector-specific bull markets, while simultaneously protecting yourself from a long-overdue retrenchment in the major market averages, then you need to check out my Successful Investing advisory service.

There is no excuse for not being prepared to profit. With Successful Investing, you can put the tools and the knowledge backed by nearly three decades of market-beating performance on your side to make smart choices with your money.

Click here to learn more about Successful Investing

HOW DO YOU RETIRE WHEN WE'RE LIVING LONGER AND SAVING LESS THAN EVER?

Part 2 of Getting Everything You Want From All That You've Got
Click Here to Read Part 1

By Josh Lewis, the "Making Money" Mortgage Expert

An article I came across this week noted that scientists now believe that someone currently in his or her 50s will someday become the first person to live to the ripe old age of 150. This longevity may seem like a radical concept since living to 100 is a rarity today but it is undeniable that Americans are living longer than ever. In fact, the average life span has increased nearly eight years since 1970, and science and medicine continue improving at a staggering rate. Once we accept that it is likely that we will live longer than we planned, the next question we must answer is: How can we afford to live that long?

This is a critical question, since the era of the defined benefit pension plan is over. Very few people enjoy the certainty of a fixed retirement income. Those that do must worry when they read articles in the business pages about the many plans that have gone bankrupt. They also may fret about unions negotiating away their benefits. Social Security income isn't even a certainty anymore. At the end of the day, we must come to grips with the fact that we will live longer than we ever anticipated and we alone will bear the responsibility of supporting ourselves throughout retirement.

Sadly, the average 50-year-old in the United States has built a retirement nest egg of only $75,000. Expert opinions vary on how much a 50-year-old should have accumulated but everyone agrees that $75,000 is not nearly enough. Doug Fabian's rule of thumb states that you should have $500,000 at age 50. With the huge gap between what we as Americans need to retire comfortably and what we are saving, you would expect boomers to be saving at a rapid rate hoping to get back on track. To the contrary, the government reported last week that the U.S. savings rate has fallen to the lowest levels since the Great Depression -- a negative 1.2%. Yes, Americans actually are spending more money than they make, despite the fact that they are woefully unprepared for retirement.

This view isn't meant to paint a picture of doom and gloom without showing you that there is a way out. There is an asset that most Americans are building that can be used to close the savings gap between where they are and where they need to be. This asset is home equity. Thanks to the real estate boom, a home is the one asset that Americans have in greater amounts than ever before. Let's look at an example of someone who did not accumulate enough liquid assets to support a desired lifestyle but how that person's home equity can be repositioned to meet living expenses.

This client, who we will call John Smith for the purposes of our discussion, actually did fairly well during the asset accumulation phase of his life. He built a nest egg that topped more than $700,000. In addition, he owns two residences free and clear. Unfortunately, Mr. Smith did not have a sell strategy in place during the stock market "tech wreck" and he incurred a significant reduction in his investable assets. Once the market and everyday living costs had taken their toll, the portfolio value was down to $335,000 in just under 10 years. After meeting with Doug and measuring the gap between where Mr. Smith was and where he needed to be, they determined that the portfolio needed to produce an additional $500 in monthly income to meet John's budget needs.

The only question to answer was the source of the $500 per month. Fortunately, while equities were crashing, John's home equity was soaring. That home equity became an untapped asset. Our calculations determined that borrowing $150,000 of equity with an interest-only loan required a payment of $812.50. That same $150,000 invested in a trend-following system with a sell discipline (a la the Fabian system) will produce $1,250 per month of income with a 10% return. The difference between the mortgage payment and the income earned amounts to $437.50 per month. When you factor in the reduction in income taxes from the interest deduction, you will gain an additional $162.50 per month to bring the total to $600 per month in additional income that is available to spend.

If you have any questions about mortgages, contact Josh Lewis by phone at 888.944.5674 ext. 1 or by email at Josh@JoshLewis.net.

If you want to learn more about using your assets to maximize your golden years, I invite you to join Doug and me March 3 at the Orange County Hilton in Anaheim, Calif.

In our new three-hour seminar, How to Achieve the Retirement of Your Dreams: Getting All That You Want From Everything You Have, we will go deep into these topics and uncover the mistakes boomers make when planning for retirement. We also will examine how the wealthy manage their home equity to safely and to predictably grow their assets. In addition, we will provide you with an understanding of changes in the U.S. financial system and how those changes will impact your retirement. Register online today or by phone at 800.391.1118 ext. 280.

RISK ASSESSMENT UPDATE

One of my goals with the Alert is to keep you up to snuff on the risks inherent in the markets right now. The way I see it, there are three potentially damaging developments with the ability to impede this market's progress. If you aren't careful, or if you don't have a plan in place to tell you when to sell, you could get caught up in one of the following three negative scenarios:

  1. Higher interest rates. We talked last week about the stealth move higher in interest rates via higher long-term bond yields. I think this is a risk that could potentially slow overall economic growth and hurt the stock market. While yields haven't yet reached the danger zone, it doesn't take much for circumstances in the bond pits to change.

  2. China bubble. If and when the world peeks behind the Wizard of Oz's curtain, it may realize that much of the growth in China is actually based on unsound socialist economic principles, bad debts and bogus accounting. Now, you may not be worried about this if you aren't invested in China -- but you should be. You see, if the China bubble bursts, it could start to affect the rest of the world's financial institutions. Such a situation could lead to a big hit in the U.S. stock market.

  3. The Iran menace. Anyone even casually interested in world news now knows that tensions between the United States and Iran haven't been this high since the hostage crises of nearly three decades ago. If Iran comes out swinging with respect to ramping up its nuclear program, we could see a major escalation of tensions in the Middle East. If this situation occurs, we likely will experience a huge spike in the price of crude oil. And, we all know the kind of adverse effect that rising crude oil prices would have on both the economy and the stock markets.

As always, we'll continue to update you about all the risk confronting you and your money. In the battle for market-beating returns, intelligence is the key. Without solid information, you're liable to march blindly into folly.

ETF NEWS: PLAYING DEFENSE

Its budget time again in Washington and President Bush's new proposals are likely to include a lot of fresh spending on defense and homeland security. As an investor, there is one great way to take advantage of this bigger slice of the federal budget pie going to defense expenditures. I am speaking here of the PowerShares Aerospace and Defense Portfolio (PPA).

This ETF boasts some of the biggest names in the defense and aerospace sector, including Boeing (BA), Lockheed Martin (LMT), General Dynamics (GD) and United Technologies (UT). PPA was designed to seek investment results that correspond generally to the price and yield (before the fees and expenses) of an equity index called the SPADE Defense index.

The ETF normally invests at least 80% of total assets in the common stocks of aerospace and defense companies. It may invest at least 90% of total assets in common stocks that comprise the SPADE Defense Index.

Unfortunately, I think rising global tensions are here to stay. Dealing with those tensions requires a lot of new military technology and that means a lot of government money going to the big defense contractors. If you are looking for a way to leverage this circumstance in your portfolio, you definitely should put PPA on your radar.

NEW SPECIAL REPORT AVAILABLE NOW!

Worried about managing risk in this uncertain political and economic climate? If you aren't worried, you should be. The risks we all face right now require sound financial stewardship. These days, you just have to know how to protect yourself.

That's why I want you all to go here for your FREE Special Report titled, "The Successful Investor's Guide To Managing Risk."

IGNORANCE IS NO POINT OF PRIDE

"It has become almost a cliché to remark that nobody boasts of ignorance of literature, but it is socially acceptable to boast ignorance of science and proudly claim incompetence in mathematics."

—Richard Dawkins,
eminent scientist and best-selling author

The words of the great Oxford scientist also can be applied to many people's attitudes toward financial matters. As an Alert reader, you already know the importance of understanding investing. However, a great number of otherwise learned people view financial ignorance as something that, if not quite socially acceptable, is nothing to really be ashamed of. That's nonsense!

People owe it to themselves and to their loved ones to know how to properly manage their financial lives. Ignorance of a subject is no point of pride. And, the more my Alert readers can do to grow their knowledge about money and investing, the better off we'll all be.

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.

Click here to Ask Doug

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