Making Money Alert
Let the 200-Day Average Be the Boss
05/20/2009
Last week the market made a decided turn downward, but so far this week stocks have returned to rally mode. The big question now is: Are we still in a bear market rally, or is this the start of a new bull market?
In my opinion, we still must call the recent climb in stocks a bear market rally. Why do I say this? Well, because I think that before we can make a true bull market call, we have to see stocks move decidedly above their 200-day moving average.
If you look at the chart below of the S&P 500, we see that despite the huge run in stocks since early March, the index has yet to break above its 200-day moving average (red line).
And while we are getting closer and closer to breaching this technically significant trend line, we still have yet to actually conquer this level of overhead resistance. I am of the opinion that before we get too excited here and make a premature bull market call -- and before you go hog wild and throw all your money back into equities -- we need to let the market decide if it's safe.
I say let's let the 200-day average be the boss.
If we break above the 200-day average, then we can make a sound and objective bull market call. Until then, however, a bull market call is more hope than fact.
If you'd like to find out how to use the 200-day moving average to your advantage, then my Successful Investing advisory service could be right for you. Hey, following the long-term trends in the market is what Successful Investing is all about, and we've been making readers money by following market trends for more than three decades.
To find out how you can put the power of objective investing on your side, click here.
This week we have a special treat, courtesy of our friends at StreetAuthority. In her great piece, Editor Amy Calistri tells us how to turn down the background noise by focusing on only the best investing ideas out there. Take it away, Amy.
What Buffett Says About Diversification Will Shock You
By Amy Calistri, Editor StreetAuthority's Stock of the Month
Working for StreetAuthority, I do a lot of different things.
In the course of a day, I may be writing an article... editing a newsletter... discussing potential picks with our staff... researching the next investing hotspot... even working with a development team on our new StreetAuthority Web site (shh... it's still a secret!).
And with so much going on, I actually find myself a little frazzled as the day goes on.
To combat this, I've started work about an hour earlier than the rest of the staff. I don't do this to show off, but found I can do more in that one hour (when I could simply focus on one task without distraction) than I could in two hours when the rest of the staff has the office buzzing.
Turning off the background noise allowed me to simplify things -- and get better results.
What does this have to do with investing? A ton.
Why Diversification is Like Drinking from a Fire Hose
Sometimes the investing waters are as clear as mud to retail investors. After all, there are literally thousands of potential plays out there.
You could try to play a rebound in the automakers. You could day-trade the banks, profiting from their roller-coaster moves. You could stick with index funds and ride out the storm. You could even try to find companies that are simply undervalued and will rebound once this crisis passes.
But the problem is that there are too many options -- it's like trying to drink from a fire hose. Too many choices make it hard to nail down the one investment that will make your portfolio a winner.
Instead, like I do every morning by getting an early start, I think successful investors need to turn off the distractions and focus their attention to a small group of the best ideas... drink from a glass, instead of a fire hose.
By shrinking your portfolio, you'll find:
It's easier to stay on top of your investments -- If you have a portfolio of 50 stocks, how well can you pay attention to each one?
Even if you read up on each one just an hour each week, you'd have a full-time job (plus 10 hours of overtime) just to give each its due.
And with this market, it's more important than ever to watch your holdings. Instead, a portfolio of just 10-12 of your best picks would need significantly less time to track each week and you'll likely sleep better at night knowing you've done your homework.
Better Portfolio Performance -- Which do you think would average higher on a test: An entire class full of students or a handful of the smartest students as picked by the teacher?
The answer is obvious... and it's the same with your portfolio.
Look through your holdings. If you have upwards of 30, 40, even 50 holdings or more, I bet you'll find some that you think are simply "OK." Hell, I'd be surprised if you don't have some you don't even like but simply haven't sold yet.
Instead, what if you culled down your portfolio to just your favorite picks? Wouldn't your portfolio be in a lot better shape going forward? You'd have the cream of the crop, instead of the entire field. Remember, it's hard to outperform the market if your portfolio is the market.
That you're not alone in trimming down your portfolio -- Warren Buffett's Berkshire Hathaway holds just 41 positions. That's a lot for an individual investor, but for a company with billions at its disposal, it's surprisingly few. On top of that, over the past 25 years, Berkshire's top five holdings have made up an average of 73% of its portfolio.
Buffett is simply a proponent for positioning a portfolio to take advantage of the best picks. He's even gone as far as saying:
"If it's your game, diversification doesn't make sense. It's crazy to put money into your 20th choice rather than your 1st choice. It's the 'LeBron James' analogy. If you have LeBron James on your team, don't take him out of the game just to make room for someone else. If you have a harem of 40 women, you never really get to know any of them well."
If the world's greatest investor is following this tact, shouldn't other investors?
That's Why We've Launched StreetAuthority's Stock of the Month
This sort of thinking is why we've recently launched our latest newsletter -- StreetAuthority's Stock of the Month -- with a "Keep it Simple" approach in mind.
It is as simple as investing gets -- just one pick per month.
I have to say, I was more than honored when Lou Betancourt, our publisher, tapped me to write this letter. It's an investing style that I find very appealing... and it follows right along with how I've been looking at the market for awhile now.I'm not investing in "the stock market," but in individual companies. You don't have to worry about oil prices, interest rates, the dollar, or what the Fed is up to -- because every "bad" economic development actually helps some investment or another.
The recession has been a bonanza for for-profit education companies as tens of thousands of laid-off job hunters sign up for retraining. In the past year, the stock of Apollo Group (APOL) has jumped 34%... ITT Educational (EDI) is up 88%.
Companies that cater to tougher economic times are doing well, too. Ross Stores (ROST) is up 21% over the past year... Family Dollar (FDI) is up 73% ... and Dollar Tree is up 47% (DLTR).
If you are simply investing with broad index funds, then you've missed these opportunities. But that doesn't mean you have to forever.
Follow this link to learn how you can join me and this simple approach.
Good Investing!
ETF Talk: A New Way to Invest in Hedge Funds
The market crash of 2008 was disastrous for most private investors, mutual funds, brokerage accounts and 401(k)s -- but not for certain well-managed hedge funds. Indeed, individual hedge funds defied the financial fallout by using strategies that generated huge profits in what otherwise seemed to be the worst year for investors since the Great Depression.
Hedge funds have been out of the reach of most investors since they typically cater to the very well-heeled. Such funds are extremely hard for most people to access, and they involve the payment of high management fees. But now those barriers are lifting through the introduction of a new exchange-traded fund (ETF) that replicates the strategies and returns of successful hedge funds.
One such fund, launched by financial services firm IndexIQ, is called the IQ Hedge Multi-Strategy Tracker (QAI). This ETF aims to replicate six hedge fund investment styles: buying long/selling short, global macroeconomic trends, market neutral, event-driven, fixed-income and emerging markets. But instead of buying into hedge funds, QAI buys a basket of ETFs.
Hedge funds typically use a variety of strategies to turn profits. Such funds "hedge" their bets through short-selling, derivatives and futures contracts, leverage and diversification. Just how successful were these strategies for the top hedge funds last year? Industry veteran and star investor George Soros managed to eke out a 10% profit for his fund in 2008. However, this gain seems paltry compared to rising financial industry investment star, John Paulson, who tripled his fund's assets from $12 billion to $36 billion from June 2007 to November 2008.
That growth was achieved by shorting mortgage-backed securities -- in the midst of the greatest decline in market history. A couple of Paulson's funds were up more than 350% last year.
Since its inception on March 25, 2009, QAI is up 2.80%. More importantly, the ETFs that QAI tracks were down just 4.1% in 2008, compared to a 38% slide in the S&P 500. And despite being a little more expensive than other ETFs with an expense ratio of 1.09%, QAI seems decidedly more cost-effective than actual hedge funds that charge a 2%-of-assets fee, as well as 20% in performance fees.
While I am optimistic about this ETF's future, I want to track QAI's performance before making any kind of buying recommendation. I will, however, be keeping a close eye on QAI, as it could represent a nice addition to a diversified portfolio.
If you want further guidance about which ETFs to trade, check out my ETF Trader service by clicking here. As always, I am happy to answer any questions that you have about ETFs. To send me your questions, simply click here. I will try to follow up in a future ETF Talk.
The Wisdom of the Quest
"For if we ever begin to suppress our search to understand nature, to quench our own intellectual excitement in a misguided effort to present a united front where it does not and should not exist, then we are truly lost."
-- Stephen Jay Gould
The late, great scientist reminds us all that the quest for knowledge should never be stymied by a desire for agreement. Whether it's science, investing or virtually any other field of human endeavor, the search for truth must always trump ensconced conformity.
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.