06/07/2006
Ever since the early part of May, being long this market hasn't been a very comfortable ride. This week has been no exception, with stocks sliding big to start off the week. On Monday the Dow Industrials sank nearly 200 points, with both the S&P 500 and the Nasdaq Composite suffering mightily throughout the trading session. Stocks continued their descent on Tuesday, although the angle of decline was much less pronounced than in Monday's trading.
Right now this market is plagued by inflation fears, and why shouldn't it be? When the Fed chief comes right out and warns that the central bank remains determined to keep lifting interest rates until price increases are under control -- like Mr. Bernanke did on Monday at an international monetary conference -- you better believe the market is on fear alert and preservation mode. This is the kind of mood that breeds a selloff, and that's exactly what we could see in the weeks ahead.
Right now we are advising subscribers to our Successful Investing service to hold a large cash position in response to the current market downtrend. As such, we've avoided much of the bearish growling that's beaten up so many bullish advisory voices.
Another way we avoid investing in the weakest of market sectors is by keeping track of these sectors on a daily, weekly and monthly basis. The old adage "knowledge is power" is a critical truism if you want to be a winning investor. The first key to knowing what to avoid is to know what's in peril.
The table below illustrates the top 10 worst-performing Exchange Traded Funds (ETFs) over the past four weeks:
Top 10 Worst ETF's
TICKER | Name | Price | % Chng | 1WK% | 4WK% |
| TBH | Merrill Lynch Telecom Brasil ADR | 28.39 | -3.11 | -5.59 | -22.62 |
| EWZ | iShares MSCI Brazil (Free) Index | 37.34 | -2.79 | -4.65 | -19.65 |
| ILF | iShares S&P Latin America 40 Index | 131.89 | -3.3 | -4.67 | -17.54 |
| BHH | B2B Internet HOLDRs | 2.55 | -3.77 | -1.54 | -17.21 |
| ITB | iShares DJ US Home Construction Index | 40.85 | -4.69 | -8.2 | -16.85 |
| EZA | iShares MSCI South Africa Index | 102 | -2.46 | -3.82 | -16.78 |
| EEM | iShares MSCI Emerg Mkts Index | 92.5 | -4.24 | -3.95 | -16.67 |
| VWO | Vanguard Emerging Markets Stock VIPERs | 63.4 | -4.32 | -4.65 | -16.58 |
| ADRE | BLDRS Emerging Markets 50 ADR Index | 122.76 | -3.5 | -3.71 | -16.42 |
| EWW | iShares MSCI Mexico (Free) Index | 36.45 | -3.57 | -4.61 | -15.63 |
As you can see, emerging markets such as Brazil, Latin America, South Africa and Mexico have really taken a beating over the past two fortnights. Also, home construction stocks have had a very tough time lately.
What this tells us is that investors, who have made some good money in these emerging markets over the past couple of years, now think the run in these stocks is over. They are getting out while they can, and moving their funds into the safety of cash, or other "flight to quality" investments.
SO, where have all of these dollars gone? Well, the table below illustrates the top 10 best-performing ETFs over the past four weeks:
Top 10 Best ETF's
TICKER | Name | Price | % Chng | 1WK% | 4WK% |
| FXE | Euro Currency Trust | 129.21 | -0.03 | 1.35 | 1.57 |
| USO | U.S. Oil Fund | 68.74 | -0.23 | 1.46 | 1.27 |
| TLT | iShares Lehman 20+ Year Treas Bond | 84.68 | -0.13 | 0.56 | 1.23 |
| UTH | Utilities HOLDRs | 117.04 | -0.81 | 2.27 | 1.21 |
| IHF | iShares JD US Healthcare Providers Index | 49.65 | -1.62 | 1.37 | 1.18 |
| IDU | iShares Dow Jones US Utilities | 78.65 | -1.04 | 1.94 | 0.72 |
| XLU | Utilities Select Sector SPDR | 32.15 | -1.2 | 1.64 | 0.69 |
| IEF | iShares Lehman 7-10 Year Treasury | 80.73 | -0.2 | -0.02 | 0.56 |
| TIP | iShares Lehman TIPS Bond | 99.73 | -0.25 | -0.37 | 0.53 |
| VPU | Vanguard Utilities VIPERs | 67.18 | -1.21 | 1.8 | 0.46 |
Here we see that flight to quality in traditional bearish market sectors such as Treasury bonds, utilities, oil and health care. So, is this a changing of the guard for this market from bull to bear? Well, it's too early to say with certainty, but by the looks of the trend over the past four weeks, it does seem as though the bear is taking hold of this market.
It's only through analysis like this that you can really get a sense of what's happening in stocks. And it's analysis like this that we've built our trend-following system upon. It's the system that has helped us beat the market for nearly three decades, and more importantly, it is the system that has kept us from sustaining the wealth killing strikes that a rabid bear is capable of delivering.
To find out more about how Successful Investing subscribers are safely riding out this market storm, click on the link below.
Don't worry; I am not going to bore you with the details of the traditional children's story. Rather, I have my own version the tale.
First we have Goldilocks, who in our story is the economy. Like the traditional Goldilocks, our economy functions best when things are just right. Not too hot, not too cold. Not too much growth to overheat the economy, and not too much economic slowing to cause a recession.
Well, the three bears here in my version of the story are the following: Energy prices; inflation and its corollary, interest rates; and housing. Let's take a quick look at each of these bears.
The first bear is energy. Now, we all know what's happened to energy prices over the past several months. Oil and gas prices have hit record highs, with oil consistently hitting the $70-a-barrel mark over much of the past month.
Now, over the past week of so energy markets have see-sawed from day to day with each new diplomatic development with Iran. But there is no doubt that high energy prices are weighing on Goldilocks, and that further pressure from the energy bear could knock the porridge out of her lap.
Inflation, and its corollary of high interest rates, is another bear waiting to disrupt the economy's equilibrium. So far Fed chief Ben Bernanke hasn't really done a good job of hiding his feelings on the fate of interest rates. A few over-interpreted comments these past few months have caused a lot of turmoil in the financial markets, and right now Wall Street just doesn't understand how to read the mind of the new Fed honcho.
I don't know if the Fed will continue raising rates over these next few months, but it certainly seems as though we will get at least one or more quarter-point hikes before the central bank is through. Will that prove to be too much for this economy to handle? Possibly, and an overshooting by the Fed could force the Goldilocks economy out of her comfortable bed.
The last bear that Goldilocks has to deal with right now is the housing market. Much has been made over the past couple of years about the mass disruption to the economy that could result from a busted housing market bubble. Until recently, however, signs of a breakdown in the housing market were only vaguely present. Now, the signs are starting to become increasingly obvious.
In recent days, the Housing Sector Index (composed of stocks that make up the industry) has declined to new 52-week lows. One of the index's key components, American Standard Co., recently reported a 43% decline in new sales. That, my friends, is an implosion, and more reports like this from other key sector companies will surely provide us with incontrovertible evidence that the housing bubble is losing air at a rate rapid enough to blow Goldilocks off the porch.
Of course, we'll be keeping a keen eye on our version of Goldilocks and her three economic bears, because unlike the traditional children's story, our tale literally changes day to day.
It seems that every day another threat to your retirement security is in the news. Even the most diligent savers are tormented by one nagging question:
"What if I don't have enough?"
Fortunately, it's possible to beat all of these threats and have the security of a retirement income stream that won't run out.
Discover an investment plan that not only generates the high income you need to fund your retirement, but also grows your principal while protecting you from the market's downside risks. It's all revealed in my free special report. Go to:
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--William Blake
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