Making Money Alert
For Experienced Swimmers Only
11/04/2009
In my youth, I spent many summer days working as a lifeguard on the beautiful beaches of Southern California. Yes, I know it was a tough job, but hey, somebody had to do it. Of course, I jest, but one thing we didn’t jest about as lifeguards was the often treacherous conditions in the Pacific Ocean. Despite its beauty, the Pacific can be a very tough customer. Riptides and heavy surf can make getting in and out of the water a challenging proposition even for expert swimmers, and even then there were days when the water was just way too rough to allow anyone in.
To distinguish between calm conditions, difficult conditions and dangerous water conditions, the lifeguards had a color-coded flag system. The green flag meant it was safe to go in the water, and the red flag meant it was too dangerous to enter. But it was the yellow flag that really worried us, because that flag signaled that only experienced swimmers should venture out into the blue.
It was during yellow flag conditions that we had to do the most rescues, as many swimmers who thought they were experienced turned out to be no match for the mighty power of even modest Pacific surf.
So, what does this have to do with the stock market? Well, everything. You see, my lifeguard experience is a perfect metaphor for the market, and right now we are experiencing yellow-flag conditions.
Over the last couple of weeks, stocks have come way off their highs. Last week the major averages fell below their short-term, 50-day moving average. We can see this trend in the chart below of the S&P 500, which fell below its 50-day moving average (blue line) last week.
As a former lifeguard, and now as a lifeguard of sorts for investors trying to navigate choppy market surf, I’d say this market is for experienced swimmers only. If you have winning positions in your portfolio, they’ve most likely fallen sharply over the past two weeks.
What you must do is make sure you don’t let a further pullback eat away at your gains. Set a stop loss on all of your invested positions, that way you can protect your gains. Hey, you can always go back into equities if this selling proves temporary, or in the language of lifeguards, as soon as the green flag returns to the beach.
Oh, and just to prove to you that I practice what I preach with respect to stop losses, subscribers to my Successful Investing advisory service recently banked double-digit percentage gains in two equity positions. These gains came as a result of having stop losses in place before the latest market dive.
If you want to find out more about how you can profit no matter how difficult the market surf, then check out Successful Investing today.
What the Fed Said
Today's Federal Reserve decision to leave interest rates unchanged, at essentially zero, came as little surprise to Wall Street. But as has become the norm on Fed decision days, the reading of the tea leaves and the parsing of the language by market pundits is in ample supply.
So this week, I thought I'd let you read what the committee said for itself. Doing so will give you a sense of the kind of language the Fed employs when discussing the economy. Now, I know this may not be the most riveting read, but it behooves you to make the effort to find out what Fed policymakers are saying. After all, their thought process behind monetary and fiscal policy affects us all.
To read the entire Federal Reserve statement, click here.
ETF Talk: Profit with the Right Materials
The government-subsidized, 3.5% third-quarter growth in U.S. gross domestic product (GDP) announced last week may or may not be a true indicator that the economy is turning around. But if the recovery is real, it could send stocks of materials companies soaring. If, however, we see the economy stall, we could see a slide in cyclical stocks.
Whichever way cyclical stocks go, there are exchange-traded funds (ETFs) that can help you profit. The best of these ETFs are linked to the basic materials sector.
If you are bullish on materials, then the ProShares Ultra Basic Materials fund (UYM) might be right for you. The ETF seeks daily investment results, before fees and expenses, which correspond to twice (200%) the daily performance of the Dow Jones U.S. Basic Materials Index.
Look no further than this morning's financial news if you want to make a bullish case for the materials sector. Investors rushed into stocks early today, after improved results on service industries and employment eased two of the biggest worries about the economy.
On the other hand, a weak report on consumer sentiment and a drop in consumer spending sent stocks sliding last Friday. In fact, the market overall retreated last week, as well as yesterday.
If you want to try to profit by going short on the materials sector during such market dips, you may want to consider the ProShares UltraShort Basic Materials (SMN). This ETF seeks daily investment results, before fees and expenses, which correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Basic Materials Index. However, the fund can be volatile. One example is its nearly 8% drop last Thursday, after the positive GDP report led some investors to conclude an economic recovery genuinely began in the third quarter.
I personally am not sure what the real GDP number would have been without the government's effort to stimulate the economy through the "cash for clunkers" program to fuel car sales, and the tax credit of up to $8,000 for first-time homebuyers. Consumer spending, which normally drives recoveries, is unlikely to climb much with the unemployment rate forecasted to top 10%. If shoppers retrench in the face of rising joblessness and tight credit, the fragile recovery could tip back into recession.
Even President Obama acknowledged last week after the release of the GDP numbers that "we have a long way to go to fully restore our economy" and recover from the deepest business slump since the 1930s-era Great Depression.
Mixed signals about the economic outlook came from Burlington Northern yesterday, as its CEO Matt Rose said that consumers will be the driver of any improvement in the economy, but he added that people aren't buying yet. And coal shipments to power plants have dropped because of lower electricity demand.
Meanwhile, Burlington Northern also announced yesterday that Warren Buffett's Berkshire Hathaway agreed to buy the nation's second-largest railroad in a $26.3 billion deal that reflects long-term optimism about the U.S. economy. At least Buffett is a believer in long-term U.S. economic growth.
Clearly, a case exists to play the materials sector either way right now. If you want my advice about which ETFs to buy and sell, check out by ETF Trader service by clicking here. Remember, I am happy to answer your questions about ETFs. To send me a question, simply click here. You may just see your question covered in a future ETF Talk.
Join Me Saturday for Our Latest Investment Teleconference
Over the past several months, I have been sharing my views on how to manage your portfolio during these unprecedented economic times via a teleconference series entitled: The Obama Impact on Your Money. Thousands of investors around the country have listened to my simple strategies for investing using exchanged-traded funds.
I have shared my views on the Obama administration's polices, policies that could damage our economy and impact your portfolio over the long term. Thankfully, we have received a gift in the form of economic stimulus that has driven asset prices back to levels not seen in over a year. I believe it is now time to consider taking profits, raising stop-losses and preparing for a much more difficult investing environment ahead.
In my third installment of this five-part series, I will be sharing with you three simple strategies to grow and protect your wealth using exchange-traded funds.
The world of ETFs keeps getting better and better. We can now invest in almost any asset class, currency, or country in the world.
Three important strategies you will learn:
- How to get defensive with your stocks and mutual funds.
- How to prepare for rising interest rates and how to profit from them.
- Which commodity ETFs deserve your attention right now, and how much of your portfolio should you devote to these funds.
Join me live this Saturday, November 7, at 12:00 (noon) Pacific time, 3:00 p.m. Eastern, as I discuss how to organize your assets, identify new opportunities, and position yourself for safety using my favorite investment vehicles -- exchange-traded funds.
This live teleconference will reach capacity, as we've built an enormous following for this learning series. I urge you to take advantage of this announcement and reserve your spot today. Click here to register.
These are unprecedented economic times. The government spending, interference in the financial markets, planned takeover of healthcare, and the assault on capitalism all have me concerned about our future.
Join me for our teleconference: The Obama Impact on Your Money -- Part 3.
It's time you got your wealth plan in order.
Happy Birthday, Carl
"Each of us is a tiny being, permitted to ride on the outermost skin of one of the smaller planets for a few dozen trips around the local star... The longest-lived organisms on Earth endure for about a millionth of the age of our planet... They barely set foot on the world stage and are promptly snuffed out -- yesterday a drop of semen, as the Roman Emperor Marcus Aurelius wrote, tomorrow a handful of ashes. If the Earth were as old as a person, a typical organism would be born, live, and die in a sliver of a second. We are fleeting, transitional creatures, snowflakes fallen on the hearth fire. That we understand even a little of our origins is one of the great triumphs of human insight and courage."
-- Carl Sagan, "Shadows of Forgotten Ancestors"
Monday, Nov. 9, marks the birthday of one of the greatest thinkers and arguably the greatest public advocate of science, reason, rationality and critical thinking the world has ever known. He is the late, great Carl Sagan, who would have turned 75 years old on Monday. Anyone with even a modicum of respect for science and reason should take a moment to pause and reflect on the great works of this amazing scientist. Happy Birthday, Carl, your legacy lives in the hearts and minds of rational people around the world.
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.
Sincerely,
Doug Fabian