Making Money Alert
It's Been a Wild Year of Volatility
10/06/2010
Peaks and valleys in the stock market are nothing new but, so far in 2010, the peaks and valleys that can be seen in a chart of the S&P 500 look like a relief map of the Himalayan Mountains. One glance at the chart here of the SPDR S&P 500 (SPY) shows just how truly volatile things have been for the benchmark domestic equity index so far this year.
As you can see, there was some fast-and-furious buying in stocks that began in early February and that lasted until late April. SPY was up 13.8% over that time. That big move upward was after the index had fallen 7.2% from its January highs. The next leg for stocks was decidedly to the downside, as those April highs evaporated into a 15.3% decline all the way through the beginning of July.
True to form, however, stocks regained their bullish composure and fought their way back up 9.8% from July to early August. Yet again, true to volatile form, stocks then slid 6.1% from their August highs to their late-August lows. You’d think that would be enough volatility for one year, but the market wasn’t done yet. In fact, the late-August to September surge took stocks up some 9.3%, putting SPY just slightly above where we were in mid-May and mid-March.
I must say that this kind of market environment is great if you’re a trader, but when you’re managing your serious money -- the money that will fund your retirement -- this kind of volatility is anything but settling. In bear markets, you can use inverse funds to make money while stocks are trending lower. In bull markets, you can use a variety of funds to make gains and beat the overall trend of a rising equity tide. The real challenge has been in environments such as we’ve had this year, where the trends last only a few months at best.
One thing that strikes me as clearly evident when looking at this chart is the probability of a hefty pullback off of the market’s current level. If the volatile pattern of 2010 holds, we are liable to get another pullback somewhere between 6% and 15%. My suspicion is that we’re liable to get that pullback soon, but so far, there only have been a few down days where sellers really have demonstrated a willingness to act.
If you are long stocks here, your best bet right now is to continue riding the current wave higher. But remember, you must have a stop-loss order in place to protect your gains. There’s nothing worse than watching a volatile market zap your unrealized gains, so make sure you keep what you’ve earned by using a stop-loss price designed to get you out of a winning position with a nice gain.
If you are out of the market right now, then your best bet is to hang onto your cash and wait for the next wave of volatility to hit. Judging by the pattern in 2010, that wave will bring stocks substantially lower -- and that’s when you’ll want to move into equities.
If you’d like to find out where to set your stop losses on winning positions, and when to get back into stocks after a pullback, then you need my Successful Investing advisory service. Hey, we’ve been beating the market for more than three decades, and one of the reasons is because we have a plan that tells us when to buy and, more importantly, when to sell stocks. If you’d like to see what this plan is all about, then check out Successful Investing today.
The Midterm Election and the Market
The nation now is less than four weeks away from the November midterm Congressional elections. After nearly two years of what essentially amounts to one-party rule, I think the American people are ready for a little more change.
I think the need for a change in Congress to an opposition party is something that the American people have expressly embraced, and certainly the pre-election polls suggest that Republicans have a very good chance of regaining control of the House of Representatives. Some polls suggest that Republicans will add seats in the Senate; however, I think it’s doubtful that the GOP will win enough seats to take control of the upper house.
Now, regardless of which political party you belong to or where in the political spectrum your personal views may lie, the political makeup in the Congress and the White House has implications for the market. I actually think that one of the reasons we’ve seen such a big spike higher in stocks in September -- a surge of nearly 9% on the S&P 500 for the month -- is due to the perception that Republicans will regain control of at least the House of Representatives.
But why would a divided government be good for stocks?
Well, basically the answer is that Wall Street loves gridlock. When new legislation, regulation and potential tax increases get jammed up by opposing Democrat and Republican interests, fewer new laws, regulations and taxes are inflicted on business. In other words, the less that gets done, the better it is for Wall Street, as Wall Street is very change averse. Now, you may think that we need more legislation, regulation and tax increases, but from the perspective of the stock market, the less that gets accomplished, the better.
If we do see Republicans take control of the House, one key thing to watch will be President Obama’s reaction. He almost will be forced to move more toward the center and away from what objectively can be called his left-of-center policies. President Clinton did this in 1994, after the Republicans took control of Congress in that midterm election, and I suspect that President Obama will do the same thing.
A shift here away from what I think most on Wall Street consider an anti-business mindset could be a big boost for both the economy and the stock market going forward.
The Global Rally Continues
When it comes to international stocks, all systems are definitely in rally mode. Look at the charts below of two of the most widely held international exchange-traded funds (ETFs) -- the iShares EAFE Index (EFA) and the iShares MSCI Emerging Markets (EEM).
As you can see, both EFA and EEM have seen tremendous price appreciation since September, as stocks in Europe, the Far East, Australasia and the many emerging markets of Asia and Latin America have been on a no-hold’s-barred tear. Right now, subscribers to my Successful Investing advisory service are enjoying big gains in EEM, but how long this run in international markets will last is anybody’s guess.
I suspect we’ll see more upside here in October, but I also think that now is most definitely not the time to take any new positions in either of these international ETF powerhouses.
ETF Talk: New Commodity Index Fund Offers Market Alternative
Commodity investing traditionally has been a challenge for individuals to pursue, but a new ETF has rolled out as a user-friendly alternative to what has been available in the past. The United States Commodity Index Fund (USCI) is a commodity pool that tracks the SummerHaven Dynamic Commodity Index Total Return, less USCI’s expenses. The index is comprised of 14 futures contracts that are selected each month from a list of 27 possible futures contracts.
As a result, USCI is what is known as an “actively managed” fund, since it buys futures contracts each month based on the pricing and inventory levels of each commodity. The aim is to diversify the fund’s holdings to avoid concentrating on a single commodity and to keep out commodities that seem less attractive during a given month. The fund also has the flexibility to buy futures contracts for the various commodities that range between three and nine months. So, the fund essentially tries to cherry-pick the available futures contracts each month to enhance profitability.
Regular readers of my ETF Talk feature know that I typically refrain from recommending new ETFs until they have established a track record and a minimum daily trading volume of about 100,000 shares. I have not changed my approach, but I do like to keep you apprised of new ETFs that break away from the traditional strategies and offer something unique. USCI, officially launched Aug. 10, is such a fund.
The investment objective of USCI specifically is for the daily changes, in percentage terms of its units’ net asset value, to reflect the daily changes of the index, which consists of six commodity sectors. Those sectors are energy, precious metals, industrial metals, grains, softs and livestock. Among those six sectors are the 27 eligible commodities that can be chosen during a given month: crude oil (brent); crude oil (WTI), gas oil, heating oil; natural gas; unleaded gasoline; feeder cattle; lean hogs; live cattle; bean oil; corn; soybeans; soybean meal; wheat; aluminum; copper; lead; nickel; tin; zinc; gold; platinum; silver; cocoa; coffee; cotton and sugar.
The 14 commodity benchmark futures contracts used for the month of October are: Corn SEP11; Cotton DEC10; Gas Oil NOV10; Wheat MAR11; Coffee DEC10; Feeder Cattle NOV10; Soybean Oil MAY11; Tin DEC10; Copper SEP11; Nickel NOV10; Sugar #11 MAY11; Unleaded Gasoline (RBOB) DEC10; Silver DEC10; and Lean Hogs DEC10. It is interesting to note that the fund left out gold futures contracts during the current month, indicating to me that the yellow metal’s recent pricing surge has made it a less attractive investment than the other commodities in the pool.
To obtain my latest ETF advice and my stop prices for each recommendation, 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 please do not hesitate to contact me if you have one. To send your question to me, click here. You may see your question answered in a future ETF Talk.
Radio Show Update: Seeking out International Dividends
In last week’s radio show, we talked about the current conditions in the market, and how best to position your money to take advantage of the upcoming buy setups taking shape right now in stocks. If you weren’t able to hear last week’s show live, then don’t worry. As an Alert reader, you have FREE access to all of my past shows, and all you have to do is go to my Radio Show archive.
This week’s show is all about finding international dividends. More specifically, we’ll discuss some of the best international, high-yield ETFs and closed-end funds out there today, and we’ll talk about how they may be right for your portfolio.
To listen to the show live each Saturday from 10 a.m.-11 a.m. Pacific Time, just go to our website.
Shakespearean Thoughts on the Climb
“To climb steep hills requires slow pace at first.”
--Shakespeare
If you’re just starting out on your investing journey, it’s important to remember that you have to begin slowly before you can climb fast. The most important thing to keep in mind when starting out is that you have to commit to steadily putting away about 10% of your gross income each month. If you can do that, your slow pace at first will enable your money to grow at a brisk pace down the road.
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.
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