Making Money Alert
Dissecting The Market
02/21/2007
To say that the current market is overbought would be the height of understatement.
The major averages keep making new multi-year highs. As a result, the indexes keep getting further and further away from their short- and long-term moving averages. The question now becomes can stocks continue to go higher. If so, how long will they rise?
Of course, stocks can go higher. I am never one to underestimate the power of the mob mentality when it comes to buying equities. But what you have to ask yourself here is how much do you think you will benefit by committing your money to a market that already has gone ballistic?
If you enter the market now at these highly overbought levels, do you think your chances are good that this market will propel you higher for months to come? I've been in the investment field for nearly three decades and I can tell you from my experience that bull runs like we've seen over the past several months don't often last.
Perhaps one way to "see" the over-extended nature of this market is to look at the chart of the Russell 2000, as represented by the iShares Russell 2000 (IWM). As you clearly can see, this measure of small-cap stocks is way above its 50-day moving average that is represented by a blue line. Normally, we could see a red line in this picture reflecting the longer-term 200-day moving average. But IWM has been so extended now for so long that the 200-day average is completely out of the picture.
When things start looking this way, it's high time to think about safety first, as well as not putting your money at any undue risk.
Let's step away from the major market averages and get into the details of one sector we've allocated to in my Successful Investing advisory service -- gold. In this chart of gold, as represented by the street TRACKS Gold (GLD), we can see a big run up in the value of the yellow metal since the beginning of the year.
From its low of just more than $60 to a high of just under $67, GLD has made a nice move higher this year. Fortunately, we've been able to capture a lot of upside for Successful Investing subscribers.
The real test for gold, as I see it, is the $67 level. There's a lot of technical resistance and the key to gold's future -- at least in the short run -- is to see if it can break above the $67 mark. If gold can surpass $67, then we are liable to see more shine ahead.
However, if gold fails to make a move above $67 or if its value begins sliding from current levels, we could be witnessing the end of the gold rush.
Either way, Successful Investing subscribers will be ready to make the right moves in gold. How? Because we always know when we are going to sell every position we enter before we buy anything. This way, we eliminate the guesswork involved in knowing when to get off a sinking ship and we can jump into the lifeboat with a tidy bag of profits in hand.
A MUTUAL WARNING
A couple of days ago, I read an excellent article written by Bill Donoghue, editor of The Proactive Fund Investor, a weekly newsletter published by MarketWatch.com. In his piece, Donoghue discussed the marketing and advertising of mutual fund performance results. He explained why investors need to be aware that past performance potentially can mislead the public into thinking that a fund is a-okay.
The basic gist of Donoghue's argument is that because of the bull market of the past several years, fund companies can publish a "bear market-free record for the past three years, and they get to publish a five-year track record with the worst bear market year of 2002 offset by the bull-market recovery year of 2003."
He argues -- and I completely agree -- that wise investors should research more relevant track records for fund comparisons. Both Donoghue and I feel that a seven-year track record to the end of 2006 would reveal how the fund performed over a full bull- and bear-market cycle. Even better, a longer 10-year performance record would include the overheated dot.com and technology years of the late 1990s, as well as the technology sector meltdown that followed the bursting of the tech balloon.
According to Donoghue, investors also should examine a mutual fund's track record of the last four bear market years. Then, compare the fund's performance in those bear markets to indexes of funds with similar objectives to see not only how the funds performed but also to assess how the funds performed relative to their competitors.
I think Donoghue's idea of comparing the seven-year track record will reveal that many fund investors were unable to reach break-even results over that period. A key reason is that most stock funds took "no defensive action" during three years of the recent bear market between 2000 and 2002, he wrote.
This article really points out what I have been arguing for some time now -- namely that financial industry marketers are paid to get you to buy their products and if they have to resort to a little numerical slight of hand, then that's what they're going to do.
I think the biggest lesson that we can learn from this experience is to be skeptical when you see performance numbers being thrown around. Always ask what time period is covered by those making fund performance claims and compare the numbers with benchmarks and other similar funds.
It might take a little extra effort on your part, but doesn't your money deserve it?
ETF NEWS: PLAYING BOTH SIDES OF THE COIN
Want to play both sides of the coin? More specifically, do you want to play both sides of the U.S. dollar? Well, now you can do so, thanks to two new exchange-traded funds (ETFs) that were launched Tuesday. The funds allow investors to make money from the movement of the U.S. dollar -- relative to a basket of foreign currencies.
The thing that I like about these new funds is that one of them is designed for dollar bulls and the other one caters to dollar bears.
The two new dollar ETFs are the PowerShares DB U.S. Dollar Bullish Fund (UUP) and the PowerShares DB U.S. Dollar Bearish Fund (UDN). Both funds already are trading on the American Stock Exchange.
"Investors are getting more data on the U.S. dollar, what's driving it and the impact on their investment portfolios, but there haven't been a lot of tools to invest in the dollar's moves," said Kevin Rich, chief executive at DB Commodity Services LLC, the ETFs' managing owner, during a media call Tuesday.
Thanks to the innovative folks at Deutsche Bank, greenback chasers now can play the dollar's moves with all of the benefits of ETFs but without the hassles inherent in trading futures contracts.
The funds, in essence, work as follows. The "dollar bullish" (UUP) will make money when the dollar rises against global currencies, while the "bearish" fund (UDN) will profit when the U.S. dollar falls.
I am a big believer in the greenback's potential for volatility, but until now I haven't been able to recommend an ETF to my advisory service subscribers that directly takes advantage of the dollar's propensity for profitable fluctuations.
Thank you, Deutsche Bank and PowerShares, for making it possible for those of us who can read the dollar's next move to play both sides of the proverbial coin.
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DARWINIAN WISDOM
"Ignorance more frequently begets confidence than does knowledge: it is those who know little, and not those who know much, who so positively assert that this or that problem will never be solved by science."--Charles Darwin
Much like science, it is those who know little about the market that often throw their hands up in frustration and declare the game "fixed" when they lose money. The "science" of investing, similar to all human action, benefits most from keen knowledge and greater understanding. Problems inherent in this endeavor only can be solved by the application of reason. Failure to exercise good judgment puts you at risk for financial peril.
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.