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Keep Your Eyes on the Four Horsemen

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01/20/2010

The market was up big on Tuesday, and down big on Wednesday. This kind of back-and-forth in equities is, I suspect, a harbinger of things to come over the next quarter. I think that we have to face the fact that buyers and sellers are going to do battle for the heart and mind of this market, and though I can’t predict with certainty which camp will win over the short term, I can tell you to keep your eyes on four specific indicators that can let you know just where the hottest battlefronts are.

I call these indicators the “Four Horsemen,” and by regularly watching a chart of each, you can get a very good sense of what the smart money out there is doing. Now, let’s take a quick look at each of these four key indicators.

1) The S&P 500 Index

This index is the best overall measure of the equity market. As you can see by the chart here, the S&P 500 still is in a strong uptrend, and it’s still more than 15% above its 200-day moving average (red line).

On Tuesday, the S&P 500 pushed to a new high, and that means it’s not really a great time to add new money to broad-based domestic equity funds. If we see the S&P 500 Index fall below the 50-day moving average (blue line), it could be a sign that a wider correction is on tap.

2) 30-Year Treasury Bond Yields

Rising bond yields equal falling bond prices. And as stock prices rise, generally the taste for bonds diminishes. But when stocks get out of favor, many investors seek the safe haven of Treasury bonds.

By keeping a close watch on yields, you can ascertain the market’s general bias toward Treasury bonds -- and, in many cases, towards stocks.

If bond yields continue rising as I expect them to do in 2010, it could mean a solid opportunity for you to profit from investments directly correlated with falling bond prices, i.e., rising bond yields.

3) US Dollar Index

We talked about the idea of currency upheaval two weeks ago in the Alert, which basically means the fate of the U.S. dollar vs. rival foreign currencies. Measuring that fate is easy with the U.S. Dollar Index.

As you can see by the chart here of $USD, there was a lot of currency upheaval in December, as the greenback fought its way back from multi-year lows. If we see more of this kind of movement in the U.S. dollar, it could translate into a decline in international equities, gold and other hard assets.

4) iShares FTSE/Xinhua China 25

This is an ETF that tracks the top 25 stocks traded in the Chinese equity market. I call it China’s Dow because, like the Dow, it’s a good measure of the overall health of the market.

As you can see, China’s market has enjoyed a great run higher since March. But just recently, FXI broke below its 50-day moving average and now seems headed for its 200-day moving average. Does this mean the run in China is over? We don’t know yet for certain, but by monitoring FXI each day, you’ll be able to tell precisely when the bulls have exited the China shop.

These Four Horsemen are great tools that you can consult on a regular basis to see for yourself how and where the money is flowing. And, while they don’t represent a complete picture of the market, being intimately familiar with these four indices’ machinations is a great way to develop a keen sense of the market’s next moves.

Investment Themes for 2010, Part 5 -- Oil & Water

Oil and Water: they’re two elements that, chemically speaking, do not mix. Yet, both do mix nicely as one investment theme I’m watching in 2010. Let’s take a look at each separately here, as they both represent potential opportunities for profits down the road.

In the case of oil, we know it’s the lifeblood of an industrial society. We also know that most of it is locked up in countries that are either hostile to the U.S. or in regions with very unstable political milieus. The volatile environment for oil is a veritable powder keg just waiting to explode with even a hint of real geopolitical turmoil.

I easily can see some kind of conflict taking place in the Middle East, particularly in Iran, that could cause huge problems -- and a huge spike -- in the price and availability of crude oil. If this happens, it could put a serious damper on world equity markets and the nascent global economic recovery. It also likely would mean big gains in oil and/or related energy ETFs.

As for water, well, that commodity is, in many regions of the developing world, literally running dry. We may not realize it here in the U.S., but our water infrastructure also is in need of a serious facelift. My friend Tom Lydon of ETFTrends.com recently wrote something that summed up the water situation quite well. “Water has become the most valuable resource of the 21st century. Its value touches down upon all socioeconomic aspects of civilization and is used in nearly every industry.”

I couldn’t agree more with Tom on the importance of water, and anything that important can be both a barometer of investment activity around the globe, as well as an opportunity to profit from ETFs that track the best water industry companies around.

With oil being the lifeblood of industrial society, and with available freshwater being essential to nearly every land-dwelling animal on earth, particularly humans, both oil and water represent potential investment opportunities in 2010 -- opportunities that we’ll continue to explore here in the Alert.

ETF Talk: Is Energy Running out of Steam?

With the energy sector exhibiting a second-straight year of weakened demand, the situation could be appealing to investors who may be willing to short utilities in a search for quick profits. Exchange-traded funds (ETFs), such as ProShares UltraShort Utilities (SPD), are available to allow aggressive investors to bet on a retreat in utility stocks. The question is when to pull the trigger on such a trade, since utilities still seem to be aided by the stock market’s general upward trend.

ProShares UltraShort Utilities is a leveraged ETF that seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Utilities Index.

But why consider shorting utilities now?

While certain sectors have been surging, utilities are vulnerable. The chart below indicates that this leveraged short fund generally has been unprofitable for investors since March. However, the chart also shows that short-term opportunities have arisen that allowed investors to turn a profit when entering and exiting at the right times. Lately, the energy sector seems to be getting low on juice.

Indeed, U.S. electricity output fell 3.7% last year to mark its biggest drop since 1938, according to federal statistics. That decline in output comes on the heels of close to a 1% production dip in 2008. Reduced U.S. energy production does not appear to be a fluke. The downward trend in demand and production for energy are attributed to a slow economy, conservation efforts and, at least last year, a relatively mild summer in many parts of the United States. As a result, forecasting demand and revenues is becoming increasingly challenging. Without a clear sign that energy demand will be rebounding, it makes it difficult for utilities and the analysts who follow them to make accurate projections.

The question for investors is whether the energy sector is on the verge of giving up some of the gains that it collected since the market began advancing last March. I currently am not recommending shorting energy stocks; however, a case certainly can be made for doing so.

If you needed to pick the industries that are most vulnerable to a retreat, utilities probably should be on your list. Of course, it does not mean investing in a leveraged short fund will help you to turn quick profits right away. You may want to wait and watch the sector in the coming weeks before deciding whether shorting utilities with a leveraged fund is something that you want to try.

If you want advice from me about which ETFs to buy and to sell, 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 do not hesitate to contact me if you have one. To send your question to me, simply click here. You may just see your question answered in a future ETF Talk.

It's Time to Squeeze Some Lemons -- Q4, 2009

It’s time again for our quarterly lemon-squeezing ritual. That’s right, it’s time for us to expose the worst-performing mutual funds for what they really are -- sour investment vehicles that will make your portfolio pucker.

For Q4, 2009, the Mutual Fund Lemon List contains 1,566 mutual funds totaling $651 billion in assets! Now, to be classified as a lemon, the fund must pass strict screening criteria: it must underperform its peer group average for the last 12 months, as well as for the last three and five year periods.

Incredibly, out of this quarter’s universe of 1,566 lemon funds, over 38% (a total of 605) actually had negative annualized returns over the past five years.

It’s becoming increasingly clear to me that investors need to wake up to the reality that many mutual funds just can’t perform as well as those exchange-traded funds (ETFs) with the same investment objective. Sadly, the result is that many investors are losing money that they really cannot afford to lose.

There really is no reason to continue investing in under-performing mutual funds. To find out if you own a lemon fund, simply click here.

Listen to my Investment Strategies Conference Call Now!

On Saturday, Jan. 9, I held my first investor teleconference of the year. This call was tremendously successful, and I want to thank all of you who called in and joined the fun.

Now, if you didn’t get a chance to call in, then don’t fret. A recording of the call is available now at my Web site. To get your FREE download of this call, click here.

In the call, I discussed the investment landscape for 2010, and I reviewed several of the investment themes for 2010 that we’ve been talking about here in the Alert for the past several weeks.

I believe 2010 will present an entirely new list of winners, and losers, in the equity and bond markets. To find out what these are, and how you can take advantage of these trends, all you have to do is listen to the call.

Here are just some of the important points we covered in this one-hour teleconference:

I urge you to devote an hour of your day to listen to this call. I think you’ll find it well worth the time.

To start listening to this call right now, simply click here.

NOTE: Fabian Wealth Strategies is an SEC registered investment adviser, and is not affiliated with Eagle Publishing.

Orwellian Wisdom

“There are some ideas so wrong that only a very intelligent person could believe in them.”

--George Orwell

The profundities emanating from the great George Orwell are nearly limitless. Here, we have the supremely intelligent novelist poking fun at those who are so smart that they are able to convince themselves that wrong ideas are actually right. The next time you find yourself trying to get your head around a controversial idea, I suggest you defer to this Orwellian axiom. It just might spare you the mental contortion of trying to accept a bad idea.

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.

P.S. My publisher, Eagle Financial Publications, is now on Facebook. Click here to see our page and be sure to become a fan when you get there.

P.P.S. With the help of global financial stimulus, a number of global markets have rallied from their lows of 2008, providing investors who were invested in the right markets at the right time with healthy returns. Although the question remains -- how do you become one of those investors? For an answer, I encourage you to attend The World MoneyShow in Orlando, February 3-6, 2010, at The Gaylord Palms Hotel and Convention Center, to hear more than 60 leading experts. They will be on hand to provide you with insights and recommendations to help you identify emerging opportunities around the globe. I hope that you will join me there! Visit The World MoneyShow Orlando to register FREE today!

 

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