Making Money Alert
Analyzing This Bear Market Rally
03/18/2009
Looking back over the landscape of the markets, the S&P 500 Index hit an intra-day low of 666 on March 6, 2009. Since that point, the market has rallied more than 16% through yesterday's close. It begs the question -- could this rally extend higher?
The answer is most certainly, "yes." But let me explain what I think is a more probable scenario. Within the context of bear markets, there are always sharp relief rallies that give investors hope for better times ahead. However, as I said in my CNBC appearance this morning, I believe this rally will be short lived and does not constitute the start of a new bull market in equities.
There will be opportunities for trading profits (more on that below) but for most individuals who are over-invested in mutual funds and stocks, I see this rally as an opportunity to reduce risk in their holdings. If you are fully invested, you may want to consider paring back your exposure to stocks above the 800 level on the S&P 500 Index.
Let's check on a performance table of the S&P 500 Index and its sector breakdown for the last week:
As you can see, financial stocks have led this rally higher, which intuitively makes sense because they were the most beaten down sector year to date. I believe that the financial sector has further to run as this rally progresses but it's important to watch how the leaders perform if and when this rally fizzles.
Remember that risk remains high throughout 2009 and I have been recommending that you manage your portfolio with a high cash position and tight stop losses. As always, we will be with you every step of the way with our weekly updates in the Making Money Alert.
Do You Have What It Takes To Be A Successful Trader?
As my dad would say, there are two kinds of money: your serious money and your play money. I know that many investors have been with me in sheltering their serious money from risk by having a high cash position and waiting for the opportunity to get back into stocks. Those that subscribe to my trend-following advice know that we are a very long ways from putting our serious money back to work in the next bull market.
For the past few weeks, there have been short-term opportunities on Wall Street to put some of your play money to work. I have five tips for those of you who are looking to put a portion of your investment capital into trading positions to produce profits in your portfolio while we wait out this Bear Market:
- Use only a portion of your portfolio. I recommend that you trade using only 10-20% of your total investment capital.
- Commit to trading with discipline. Losses must be kept small and the best way to do that is by using trailing stop losses on every position that you take.
- Use Exchange Traded Funds. There is no easier way to trade than with exchange-traded funds (ETFs). They give you the best combination of liquidity, flexibility, low-cost, and diversification.
- Monitor Your Gains and Losses. You must put in place a system to track your performance so that you know the scoreboard at all times.
- Dedicate Time. You need time to research investment ideas, select your positions and allocations, monitor the market, and execute your plan. If you don't have the time, don't venture into the game.
If you are interested in taking a portion of your investment portfolio and trading with ETFs consider this special offer. I do the research, send you the recommendations, and monitor the stop losses.
The Spirit of Radio -- 10 Years and Counting
On Saturday, March 7, I had the pleasure of celebrating 10 years of doing my radio show, Doug Fabian's Wealth Strategies. The show was really fun, and many of you have written in to tell me how much you've enjoyed it.
Here's one of my favorite e-mails from a listener named John:
"Hi Doug, I used to listen to your radio show every Saturday morning back when you were on 97.1 FM Talk in Los Angeles. I took a lot of your lessons to heart and still employ your strategies to this day. In fact, I am writing to thank you from saving me from the recent market downturn. When the market slid below the 200-day moving average back in February/March 2008, I started steadily selling my funds over the next several months. I currently am 85% cash and 15% in stock mutual funds and could not be more happy or relieved."
This is the kind of e-mail that makes me brim with gratification, so thank you, John, and all I can say is that I am happy you and so many others listen to the show every week.
If you'd like to listen to my 10-year radio anniversary broadcast, click here.
ETF Talk: Is China's Great Wall of Growth Showing Cracks?
For the last 30 years, the economy that has achieved the fastest and most consistent growth in the world may well be China's. Despite the current global recession, the Chinese economy still grew 9.8% in 2008. It marked the first year of single-digit percentage growth for the country since 2003, after notching double-digit percentage growth between 2003 and 2007.
Chinese government officials claim that their nation contributed more than 20% to the world's economic growth last year. They also optimistically forecast economic growth of at least 8% for this year. However, a number of independent private sector estimates, including those from Economist magazine and the International Monetary Fund, estimate China's economic growth will fall below 7% and possibly slip to 6%. With relatively high growth rates, compared to other countries, investors may wonder if China could offer a hedge against recessionary conditions elsewhere.
If 2008 is any indication, investors should tread cautiously before going either long or short in the Chinese market. Despite the country's growing economy, history shows that the correlation between global stock markets increases during times of recession. As the Dow fell 33% last year, the Shanghai Composite Index plunged 65%. The iShares FTSE/Xinhua China 25 (FXI), an exchange-traded fund (ETF) that follows 25 companies on the Shanghai stock exchange, dropped 47.76% last year. If you were shorting the Shanghai stock exchange through UltraShort FTSE/Xinhua China 25 (FXP), you would have lost 53.61%. You might expect a short ETF to turn a profit if the stock index that it tracks plummets but China certainly did not follow that pattern last year.
Despite the positive spin that Chinese government officials are giving to the country's economic outlook, it is hard for me to believe that its stock market is ready to rebound. But that hasn't stopped its leaders from expressing renewed confidence in its economy. The Chinese government reported last week that its industrial output last year rose by 5.7%, while its retail industry grew by 17.4%, year-on-year. In addition, China has nearly $2 trillion in reserves and a low debt-to-GDP ratio of 18%, compared to 80% in the United States and 160% in Japan.
Personally, I am not yet ready to move into China either long or short. If you, however, think that the Chinese market has bottomed out and that its government stimulus spending will give the Chinese economy a boost, you may want to consider going long. For those who expect more fallout in the Chinese market this year, you may be tempted to put a little money into a short ETF. But if you're like me and you dislike losing money and investing without a clear market direction in sight, you can monitor these ETFs from the sidelines along with the Fabian team.
Long | Short |
iShares FTSE/Xinhua China 25 Index (FXI) | Ultrashort FTSE/Xinhua China 25 Index (FXP) |
PowerShares Gldn Dragon Halter USX China (PGJ) | |
SPDR S&P China ETF (GXC) |
If you want guidance about which ETFs to trade and when, check out my ETF Trader service by clicking here. As always, I encourage you to send me any questions that you have about ETFs. To do so, simply click here. I will try to follow up in a future ETF Talk.
Passionate Pursuits
"Without passion, you don't have energy; without energy, you have nothing. Nothing great in the world has been accomplished without passion."
-- Donald Trump
One of my foremost goals in life is to tackle every task with the greatest of passion and energy to achieve success. I apply that philosophy by putting the time, tools, and discipline I have acquired over the last three decades to work for you each week. Remember that during these uncertain times, passionately pursuing your dreams will lead to success.
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.