Making Money Alert
Damage Plan -- and How to Profit
06/21/2006
The damage to the market in the last few weeks has been severe.
I think that everyone with even a casual knowledge of the equity markets knows this to be true. And even though last week, and again today, we've seen a flurry of big buying in stocks, there is no denying that the technical damage inflicted upon this market over the past eight weeks has been serious.
Now when I say technical damage, I mean the value of the major market indices in relation to their long-term moving averages. The long-term market average is measured by something called the 200-day moving average, which is just a sophisticated way of averaging out daily prices and then plotting them on a graph.
Often, where a particular index's current price is in relation to its long-term moving average can speak volumes about what is likely to happen going forward.
Take a look at the chart below of the Wilshire 5000 index. This is the broadest measure of the market, representing nearly the entire universe of stocks traded on each of the three major exchanges.
As you can see, the price of the Wilshire 5000 (the jagged line) is now below the price of its 200-day moving average. Many times what happens is that when an index moves below its 200-day average a lot of sellers come out and liquidate positions. This certainly happened when the Wilshire 5000 first slipped below its 200-day moving average a few weeks ago.
Right now there is the potential for a downward trend in the 200-day average, and that is another indication that more pain and suffering for stocks is on the way. Now this downtrend in the average hasn't happened just yet. It takes time for a long-term trend line to reverse course, in either direction. But we are watching things very closely for signs that could be the precursor of more pain ahead for stocks.
Right now we are using bear market funds aggressively in our ETF Trader service, and we also have a small bear market fund position in our Successful Investing service. Bear market funds are designed to move higher as the market falls.
So far, our bear market portfolios are zooming higher while the rest of the market suffers the selloff. If you want to learn more about how we're making money while the so-called experts on Wall Street are running for cover, I urge you to click on the links below:
Click Here to Learn More About Successful Investing
Click Here to Learn More About ETF Trader
Finally, don't get sucked in by these short-term rebound rallies. The market looks like it will be up a little over 1% in today's session, but one or two days do not make a comeback. It's going to take more than just a few days of bargain shopping that brings stocks higher before we can declare an end to the technical damage.
When the carnage ends, as it inevitably will, we'll be right there on top of it, telling you how and where to profit.
ETF UPDATE -- LET THE BEAR ROAR, AND MULTIPLY BY 2!
Don't you just love all the new ETFs that are coming to market?
I certainly do, and based on their popularity, I think Wall Street is finally getting the message when it comes to what investors really want.
And what do we really want? We want low transaction costs, objective management, ease of trade -- and we want to know exactly what we are getting with our investment dollars. That's what ETFs offer, and although it's taken a few years, that's in fact what Wall Street is giving us.
Case in point is the eight new ETF offerings that began trading today on the American Stock Exchange. The company putting these new ETFs out to the market is ProShares, a division of ProFunds -- a great company that I like, and whose mutual funds I recommend in my subscription services.
The big news with these ProShares offerings is that now you can purchase not one, but four different bear market ETFs. These bear ETFs are designed to move in the opposite direction of their respective indices. For example, the ProShares Short S&P 500 (SH) is designed to move higher when the S&P 500 falls. That means if the S&P 500 index loses 2%, then SH will gain 2%.
It's the same principle for the other three bear fund offerings from ProShares. These funds also provide short exposure to various segments of the stock market. All of the bear funds seek daily investment results that correspond to the inverse of those indexes, before fees and expenses (see below for complete list of ETFs).
In addition to the four bear offerings, ProShares has come out with four funds that take advantage of leverage. They are called the "Ultra" ProShares, and they are the first ETFs designed to magnify daily index performance. These funds seek daily investment results that correspond to twice the performance of their underlying indexes, before fees and expenses.
In the case of the ProShares Ultra S&P 500 (SH), if the S&P 500 index rises 2% then SH will rise 4%. Those kinds of hyper-gains are what Ultra funds are all about, and when conditions in the market permit these leveraged bets, they can be a really nice way to pump up your portfolio's overall performance.
"We look at ProShares as the start of a whole new chapter in the development of ETFs," said Michael Sapir, CEO of ProShare Advisors LLC, part of ProFunds Group, in an announcement that accompanied today's premiere of these eight new ETFs.
"By providing built-in short and magnified exposure to the indexes, ProShares make it much easier to execute a number of powerful strategies. In times like these, when the markets haven't necessarily offered a lot of help, we've seen investors interested in pursuing more sophisticated strategies -- for example, hedging to manage risk. Now, to execute that strategy, they no longer have to go through the process of setting up margin accounts or covering margin calls -- they can simply trade ProShares."
I completely agree with Mr. Sapir, and I don't think it will take much time before I begin using some of these new ProShares ETFs in my own portfolio.
ProShares Short Fund Offerings:
Short QQQ—Inverse of the Nasdaq-100—(PSQ)
Short S&P500—Inverse of the S&P 500—(SH)
Short MidCap400—Inverse of the S&P MidCap 400—(MYY)
Short Dow 30—Inverse of the Dow Jones Industrial Average—(DOG)
ProShares Leveraged Offerings:
Ultra QQQ—Double the Nasdaq-100 Index—(QLD)
Ultra S&P500—Double the S&P 500 Index—(SSO)
Ultra MidCap400—Double the S&P MidCap 400—(MVV)
Ultra Dow30—Double the Dow Jones Industrial Ave—(DDM)
PAIN AND PLEASURE -- OUR MASTERS
"Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do."
—Jeremy Bentham
I'm quite certain Bentham's proclamation has at some point invaded your decision making process when it comes to the stock market. Hey, it's totally understandable. Like Bentham says, it's our nature. But success in the markets, and often in every other walk of life, depends on critical thinking and discipline -- characteristics which we all must work to apply to our actions.
When it comes to investing, nothing is more important than critical thinking and discipline. Pain and pleasure may be our masters, but reason and logic can help us break the chains of our nature.
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 Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.