Making Money Alert
Fed Pauses, Market Yawns
08/10/2006
Yesterday's decision by the Federal Reserve not to raise interest rates for the first time in more than two years was supposed to be greeted with a big celebration on Wall Street. Initially, stocks did jump higher but the rally fizzled and stocks sold off within an hour after the announcement that the federal funds rate would remain at 5.25%. It was not exactly what the bulls out there were proclaiming would happen when the Fed finally pushed the pause button.
The failure of stocks to make significant progress toward the upside after yesterday's announcement was an indication of two things. First, investors are still not clear on whether inflation has really been tempered enough that the Fed won't decide to continue hiking rates at their next meeting in September. In fact, the language of the accompanying statement to the Fed's announcement admitted that inflation risks remained a concern.
Second, there is a lot of worry out there that the Fed may have overshot in their tightening campaign and slowed the economy down enough to where both corporate profits and the consumer will be negatively affected. In my opinion, yesterday's pause was a partial admission that the central bank may have gone too far and that the economy is slowing too fast. I think what the central bank is really telling us is that the economy is a lot weaker than people generally think and equities could have a tough slog ahead.
The key going forward will be corporate earnings. This morning, we saw strong numbers from both Cisco Systems and Disney that helped to spur a mild rally before stocks finished down for the day by the close of trading. It's going to take a lot more good earnings reports and positive news on the inflation front before the market really starts to come back. We are going to be watching the S&P 500 closely during the next couple of weeks to see if it can break through the 1300 mark. If stocks manage to push through, then maybe we are on our way back. Until then, however, stocks remain very risky, and investors should continue approaching this market with extreme caution.
ETF STRATEGIES FOR AN UNCERTAIN MARKET: PART IV -- CAPITALIZING ON COMMODITIES
We've now arrived at the fourth installment of our five-part series on Exchange Traded Fund (ETFs) strategies for an uncertain market. This week, we're going to cover what I think is one of the best developments to come into the investment arena in years: the arrival of commodities ETFs.
Before commodities ETFs, investors who wanted to participate in bull markets in gold, silver, oil or other commodities had to venture into the treacherous waters of the futures markets. It was not a very good place to be unless you were a very experienced trader. Aside from trying to make money using futures contracts, the only other alternative for commodities investors was mutual funds. Now, there are good mutual funds that focus on oil and gold mining stocks, but these funds don't focus on the "spot" price (actual price of the commodity) of oil, gold or silver.
However, several ETFs have come to market that allow the average investor to play the commodities markets safely, transparently and at a low cost. Let's take a look at six-month price charts for some of the best of the best; streetTRACKS Gold (GLD), U.S. Oil Fund (USO), iShares Silver Trust (SLV) and DB Commodities Index Tracking Fund (DBC).
All four of these charts look like a technicians dream right here. All of these ETFs are trading well above their 50- and 200-day moving averages, and all have recently come back strong after some consolidation in mid-July.
In an uncertain stock market environment, commodities ETFs can be used as trading vehicles to help you boost your overall performance. Hey, when stocks are in the doldrums, why not shine up your portfolio with a little gold?
Well, that's exactly what we did in our Successful Investing advisory service. From early April to mid-May, we used gold ETFs to capture a realized gain of 17.34%! Not too bad, especially considering that stocks tanked right about May 9. You see, often when stocks are weakening, there is flight to quality in commodities, particularly gold. And now, thanks to these new ETFs, investing in commodities is a cinch.
Right now, we are advising subscribers to take a position in gold using ETFs. In the short time since we've recommended this allocation, our gold position is up about 5%. Before I go on, a word of caution here is in order. If you decide to put money to work in any commodities-related ETF, be sure to set a sell point for your positions. The commodities markets are inherently volatile, much more so than stocks. So, if you play the commodities game, be sure you protect yourself on the downside.
In Successful Investing, we always know exactly when we will sell every position we enter. We never let a loss get big, and we never let a healthy profit evaporate. It's all part of our time-tested plan to help you to protect and to grow your assets.
There currently are six commodities ETFs (see previous table) that investors can use in uncertain markets. However, there are sure to be more commodities ETFs coming to market in the near future. Subscribers to Successful Investing get a complete picture of the entire ETF universe each week, as our proprietary reporting on every ETF available is unique within the industry. In fact, no other publication gives you the price and performance details you need to be a good ETF investor.
Want to find out more about how Successful Investing provides you with the tools and strategies you need to become a winning ETF investor? The answer is just one mouse click away.
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A LITTLE THOUGHT ON TIME
"Time is at once the most valuable and the most perishable of all our possessions."
— John Randolph
One of the goals of the Fabian services is to help you to generate the kind of wealth you deserve; wealth that allows you to enjoy that most precious of all commodities, time.
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.
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