Making Money Alert
An Ominous Parallel
08/29/2007
When it comes to your serious money -- the money that someday is going to take care of you -- you've got to be ultra cautious in times like these. Remember that we are not talking here about your "Vegas Money" or your "Mad Money." We are talking here about the money that you simply cannot afford to lose.
Those of you who've been reading my stuff for some time now know that when it comes to money, I am nothing if not serious. That said I want to alert you to what I think is a truly ominous parallel emerging between the current market conditions and the market conditions when the last bear market started.
Right before the bear market of 2000 began, the technology sector constantly was making new all-time highs. In March of that year, the NASDAQ Composite peaked at 5049. Just 22 days later the tech-heavy index had fallen 20% and we officially had entered bear market territory.
Fast forward more than seven years and we have a market led chiefly by financial stocks. In fact, financial stocks comprise more than 20% of the S&P 500. That financial sector's ascent was one reason why the S&P 500 soared to record highs in July.
Well, in just a matter of weeks (about the same time it took techs to fall into bear mode in 2000) financial stocks have fallen nearly 15%. Some of the more high-profile financial stocks are off much more than 15%. The nation's largest mortgage lender, Countrywide Financial (CFC), is 56% off its high, while investment banking giant Bear Stearns (BSC) is 36% off its high (as of 8/28/07).
If we look at chart above of the S&P 500 (red and black line) and the Financial Select Sector SPDR (XLF) (black line), we can see how the drop in financials -- although more severe than the S&P 500 -- has led the broad-based index lower.
I think the comparison between tech stocks leading the NASDAQ lower in 2000 and financials leading the S&P 500 lower in 2007 is a good one to keep in mind because we all know what kind of pain the tech wreck of 2000 brought investors.
Will the financial sector fiasco of 2007 pull us down into bear market territory this time around? It's certainly possible, although we do have a long way to go before we can call this correction a bear market.
I will be keeping an eye on these ominous parallels between tech 2000 and financials 2007, because as the Bard once famously wrote, "What is past is prologue."
THE NEXT BUYING OPPORTUNITY
I think that at some point this year, all of the market volatility we're now seeing is going to subside. When it does, stocks will begin to look attractive once again, and this time they will be at a much more attractive, much lower-risk entry point.
This sounds great, right? Well, you will have a better entry point, if you have some cash available to actually buy stocks. The problem with many investors right now is that they still are clinging to a buy-and-hold strategy with their portfolios. Many people have remained fully invested in equities, despite the sharp correction that began in July.
If you are one of these investors, you owe it to yourself to lighten-up on your equity positions. If you have gains in some areas that have been beaten up of late, why not sell and collect your profits before you see them all evaporate into the financial ether?
By reducing your exposure to equities now, you not only save yourself from further downside, but you also raise cash. That cash can and should be used to take advantage of the next buying opportunity in equities.
Right now, subscribers to my Successful Investing advisory service are riding out this market storm from the safety and security of cash. We also currently are preparing ourselves for the next big buying opportunity by building up a watch list of likely exchange-traded funds (ETFs) and mutual funds that will give us the best opportunity to grow our serious money.
Whatever you do, I implore you not to sit around passively and let the market take you for a tumultuous ride. Get off the rollercoaster and get into cash.
When the wild ride is over, you will be in a great position to objectively allocate your money to the best opportunities the market has to offer.
Want to find out what ETFs and mutual funds Successful Investing subscribers have on their watch list? Click here (insert SI offer link)
Blogs Away: A Fabian Aural Fixation 2
Can't wait until Saturday to hear Doug's radio show (insert link)? No problem, now you can get your mid-week Fabian aural fix by listening to Doug's weekly audio blog. Get the latest on this volatile market straight from the man himself.
To listen to this week's audio blog, simply
click here.ETF NEWS: SUPER SECTOR FUNDS
Look, up in the sky! It's a bird, it's a plane, no, it's Super Sector funds!
Sorry, but my pop-culture literacy wouldn't let me avoid the obvious Superman reference here when introducing the newest ETFs from Claymore Securities.
These new ETFs are called Super Sector funds, a name that Claymore came up with for its joint venture with mutual fund-rating service Morningstar.
These Super Sector ETFs are constructed by collecting stocks from Morningstar's 12 sector classifications (energy, materials, industrials, healthcare, etc). The stocks then are aggregated into one of the three Super Sectors which are: Manufacturing, Services, and Information.
The indexes are market-cap weighted and rebalanced on a quarterly basis. Expenses in these funds are very attractive, with each boasting a low 0.4% expense ratio. The three Super Sector funds are listed as follows:
Claymore/Morningstar Information Super Sector (MZN)
Claymore/Morningstar Services Super Sector (MZO)
Claymore/Morningstar Manufacturing Super Sector (MZG)
My friend Tom Lydon did a nice write up on each of these funds in his (ETF Trends) service. Below is his description of each new Super Sector fund.
Claymore/Morningstar Information Super Sector (MZN)
"This ETF tracks the Morningstar Information Super sector Index that is designed to identify and follow companies that support and facilitate the exchange of ideas and information as a basis for commerce. Examples of these industries include software, hardware, media and telecommunication sectors."
Claymore/Morningstar Services Super Sector (MZO)
"MZO tracks the Morningstar Services Super Sector Index that is designed to identify and follow companies whose main source of revenue comes from providing services. Eligible companies for this index include the health care services, consumer services, business services and financial services sectors."
Claymore/Morningstar Manufacturing Super Sector (MZG)
"This ETF tracks the Morningstar Manufacturing Super Sector Index that is designed to identify and follow companies in 'smokestack' industries that process raw materials into physical goods that are sold into industrial and consumer markets. Companies that could be included in this index include consumer goods, industrial materials, energy and utility sectors."
Thanks for the great descriptions, Tom. I know that I will be watching these Super Sector funds for signs of super performance once this market gets over its selling flu.
COACHES CORNER: WHAT'S YOUR LARGEST HOLDING?
Do you know what your largest holding is? I suspect that many of you do, but I also suspect that many of you do not.
If you are one of those who do not know what your largest holding is, don't be ashamed. Whenever I do one of my Fabian Wealth Strategies coaching sessions, the first thing I do is identify your largest-single holding.
Why do I do this? Well, because what happens to your largest-single holding will have a greater impact on your total portfolio than anything else. If your largest holding is an S&P 500 fund; a financial stock fund; a small-cap stock fund, or any number of beaten-up sector funds, your total portfolio has likely had a tough go of it lately.
The remedy here is to first identify your largest holding. If you are overexposed to a sickly market sector, you need to take action to get your portfolio back to good health.
If you need some help assessing your portfolio's vitality, Fabian Wealth Strategies can help. All you have to do is call us and schedule your coaching session.
For more information on how to schedule your very own coaching session, call David Fabian at 800.391.1118, or e-mail him.
"DOWNSIDE UP" WISDOM
All the strangers look like family
All the family looks so strange
The only constant I am sure of
Is this accelerating rate of change
--Peter Gabriel, "Downside Up"
When it comes to the market, it's all about the "accelerating rate of change." Hey, the constant flux in this business is one of the things I love so much about it. Yes, it can be frustrating at times, but helping you alleviate those feelings of frustration is one of the most rewarding parts of my job. Let's face it; change is always present. Why not embrace it?
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.