Making Money Alert
Behold the Schizophrenic Market
08/18/2010
The common (non-medical) definition of the term schizophrenia is a state of things characterized by the coexistence of contradictory or incompatible elements. And while this definition isn’t precise, I don’t think that many market participants would object to describing this market as schizophrenic.
So far this week, we’ve witnessed some very strong buying in stocks that’s pushed the S&P 500 Index back above its 50-day moving average. Yet, as you can see by the chart here of SPX, the path toward the current 1,100 mark has been anything but smooth.
In fact, just last week, we saw stocks take a major tumble, with the SPX falling nearly 4%. That decline came after a protracted period of high-volume buying that lifted the market off of its July lows and back past not only the short-term moving average, but also the long-term, 200-day moving average.
Right now, stocks in the S&P 500 essentially are trading in moving average purgatory. The question now becomes -- will they once again taste the fire below, or will they ascend to the bullish ether?
My suspicions tell me that we’ll break back above the 200-day average before we fall back below the 50-day average. I base those suspicions on recent trading activity, as well as the sense I get that despite the rash of fears populating the market landscape, people actually want to be bullish.
I think that the smart money will continue adding to equities as we finish out the summer, but of course, I cannot be certain of that. What I can be certain of is the absolute requirement of having a strict sell discipline in case this market takes another big downturn the way it did in June. Having stop-loss orders on all of your invested positions will ensure that you don’t get burned if the next move out of purgatory is, in fact, into the fire below.
If you’d like to find out how and, more importantly where, to put stop-loss orders on your invested positions, then check out my Successful Investing advisory service.
It's Inflation and Deflation
There is perhaps no more contentious debate out there among market mavens than the inflation vs. deflation debate. In the inflation camp, you have those arguing that thanks to the government’s über-loose monetary policy and its willingness to print money pell-mell, the logical conclusion is inevitably inflation or even hyperinflation.
Then you have the deflation camp saying that because the government’s monetary policies will ultimately fail to pump up and sustain inflation, you will see a big collapse in asset prices and a contraction in credit.
But how do you know which camp is right?
One way to monitor which side of the debate is closer to the truth is to look at the value of the U.S. dollar vs. rival foreign currencies. When the dollar is falling in value, i.e., when it’s worth less, inflation is taking place. Conversely, when the dollar is rising, it can be interpreted as a sign of deflation.
In the chart here of the U.S. Dollar Index, an index that measures the value of the greenback against other major global currencies, we see that from December to June deflation essentially ruled the roost. Despite efforts by the Federal Reserve to keep pumping liquidity into the market, the dollar just kept rising. In June, however, the tables were turned on the dollar, and from early that month until mid-August the dollar came down hard.
I know all of the arguments for and against both inflation and deflation, and they are too numerous to detail here. But what I think is actually happening is that there is both inflation and deflation at work, depending on what part of the economic pyramid you reside. If you are at the bottom of the income pyramid, then prices are rising and wages are stagnant. If you are at the top of the pyramid, your asset values (real estate, securities, etc.) are falling.
For those who want to read more about this issue, I suggest that you check out a great blog site called Daneric’s Elliot Wave. Scroll down to the section heading “THE EFFECTS OF A COLLAPSING PONZI IN SLOW MOTION - DEFLATION AND INFLATION AT THE OPPOSITE ENDS OF THE PYRAMID” and you can read this fine analysis on the economic pyramid and the inflation-deflation spectrum. It’s a definite must-read for those interested in this issue.
ETF Talk: Global Fund Offers Enticing Dividend Yields
With the world’s stock markets showing weakness recently, one strategy for investors to cushion the fall and still allow for the potential of capital appreciation is to invest in dividend-paying stocks. The yields on such stocks have been on the rise lately and the advent of exchange-traded funds (ETFs) now lets you make one investment to gain the benefit of diversification through an array of international holdings.
A fund that you can use to tap the increased yield of stocks is WisdomTree Global Equity Income Fund (DEW). The ETF, previously named WisdomTree Europe Equity Income Fund, seeks investment results that closely correspond to the price and yield performance, before fees and expenses, of the WisdomTree Global Equity Income Index.
Despite the new name, the fund’s focus of letting investors buy dividend-paying stocks that are mostly outside of the United States remains intact. As a dividend-paying fund, DEW actually offers a nice yield. The fund currently lists a standardized yield of 4.37%. With banks and government bonds paying far lower interest rates, DEW is attractive for its capital appreciation opportunity and its enticing yield. Indeed, average dividend yields for European stocks are higher than the rates paid on government bonds for only the third time in the last 30 years, The Wall Street Journal reported in an Aug. 7 article, “Europe’s Eye-Catching Dividends.”
The chart below shows that DEW is rebounding, after pulling back recently. The obvious question is whether the recent upswing will continue. If it does, DEW will be a nice investment that will provide capital appreciation from increases in its share price, as well as income from the dividend payments. You win both ways.
If the fund’s share price pulls back again with the rest of the market, you will be cushioned somewhat because dividend-paying investments typically hold their value better than non dividend-paying stocks. Even if the market takes time to recover, you still receive dividend payments while you wait, if you decide to hang onto the fund for awhile.
Of course, public companies that pay dividends sometimes cut or reduce them. With an ETF, you are protected from 100% of your portfolio eliminating dividend payments at the same time. Companies typically try to avoid reducing their dividends and certain companies that generate strong cash flow are unlikely to need to take such actions, even in an economic slowdown.
The fund also offers a variety of investments to reduce investor risk. The largest percentage of its holdings in any one company is 2.17% in AT&T, as of Aug. 16. The other top four holdings of the fund on that date were: Total SA, 2.06%; Vodafone Group PLC, 1.85%; Telefonica SA, 1.77%; and France Telecom SA, 1.65%. DEW’s biggest sector concentration, also on Aug. 16, was financials, 23.1%, followed by telecommunications services, 18.7%; utilities, 13.06%; healthcare, 10.49%; and consumer staples, 8.67%. Among its country holdings on that date, the United States accounted for 20.41%; France, 13.26%; the United Kingdom, 12.8%; Australia, 8.94%; and Spain, 6.61%.
If you want advice from me about which ETFs to buy and to sell, I encourage you to sign up for my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs, so do not hesitate to contact me if you have one. To send your question to me, simply click here. You may just see your question answered in a future ETF Talk.
Radio Show Update: 7 Secrets for ETF Investors
In our most recent radio show, we talked about the dangers inherent in municipal bonds, and how a blowup in some remote municipality could result in a decline in all municipal bonds. We also discussed the issues pertinent to the million-dollar portfolio. I received a lot of emails about the show, so if you haven’t had a chance to listen yet, then I encourage you to do so.
As an Alert reader, you have FREE access to my Radio Show archive, and all you have to do is go to the website and listen for yourself, at your convenience.
This week, I’m going to tell you a few secrets. Well, I’m actually going to tell you about seven secrets that ETF investors can use to maximize gains and minimize risk. We’ll also talk a little bit about the current bond market machinations, and we’ll explain why some are saying that we now are experiencing a bond bubble.
To listen to the show live each Saturday morning from 10 a.m.-11 a.m. Pacific Time, just go our website.
On Transitory Achievement
From first to last
The peak is never passed
Something always fires the light that gets in your eyes
One moment’s high, and glory rolls on by
Like a streak of lightning
That flashes and fades in the summer sky
-- RUSH, “Marathon”
The wisdom found in the lyrics of the great progressive rock trio RUSH spans an incredible period of more than three decades. In their 1985 song “Marathon,” the band tells us that there always will be a next level of achievement that one can reach. They also remind us of the bittersweet irony that those moments usually are transitory. In my opinion, this just speaks to why it’s crucial that we make each and every moment of our lives count.
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.
P.S. It’s not too late to start making plans to join me at the MoneyShow in San Francisco, August 19-21. This year’s event will be held at The Marriott Marquis and will feature 50 of the world’s smartest investors, traders and analysts. To join me in San Francisco, you can register FREE of charge by calling 800/970-4355 and mentioning priority code 018509 or by visiting the MoneyShow’s website at The MoneyShow San Francisco!
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