Making Money Alert

Forgot?

Sections

Articles

The Best Rallies Happen In Bear Markets

Print This

12/03/2008

The bear market of 2008 is still with us, and despite the recent spat of bullish days for stocks, we are still way below both the short- and long-term trends in the overall market.

As you can see from the chart below of the S&P 500 Index, the broad measure of the market is still trading well below both its 50-day (blue line) and 200-day (red line) moving averages.

One thing to note, however, is that SPX may have put in a short-term trading bottom in November. This potentially could be a meaningful low for stocks, and one that may have launched the next phase of buying that could result in a continuation of what we've seen during the past couple of weeks.

Now, even if the long-term outlook for the market is still lower -- as I suspect it will be -- you have to realize that most of the market's best rallies have occurred during bear markets.

My friend "Tokyo Russ" sent me the following data-packed chart on historical bear market rallies from 1929 through 1933.

As you can see, within the overall downtrend in stocks during the worst of the Great Depression years, there were also some really big market rallies.

This is the pattern we are likely to see during the next several years, as stocks attempt to come out of the funk they've been in for so long. Hey, a recovery in the markets is never easy, and it's never pretty. It's almost always fraught with peril, and picking your spots as an investor has never been trickier.

Having said that, however, there are ways to pick your spots and make some very sizeable short-term profits. How do I know this? Well, because that is exactly what we are doing in my ETF Trader advisory service.

In fact, during the past several weeks we've banked big profits in many of today's fastest moving sectors. Some of those sectors have moved lower, but thanks to inverse exchange-traded funds (ETFs) we've capitalized on the downward trend. We've also used leveraged ETFs to really add some kick to our portfolio.

If investing for gains in this volatile market appeals to you, then you have to check out my ETF Trader service by clicking here.

Doubling Down is for Wimps: Go for the Triple

I'm a big fan of using leverage with my investments. When investing for short-term profits, there's nothing as good as having a 2-beta fund in your portfolio. What's a 2-beta fund? It's a fund -- usually an ETF -- that moves twice as fast as the underlying index. These 2-beta funds can move in the same direction as an index, or they can move the inverse of a particular index.

But what if you are the impatient, even impetuous type who craves even more leverage? What if there were funds that allowed you to go for a triple play?

Well, you're in luck. Thanks to ETF issuer Direxion, there are eight new ETFs that are leveraged bull and bear funds designed to seek 300% -- yes, that's 3-beta -- of the daily performance, or 300% of the inverse of the daily performance, of the four indexes they track.

Now before we go any further, I want to make sure you understand that 3-beta ETFs should not be viewed as core portfolio holdings. They are too volatile to be used for that purpose.

But if you like to live on the investment edge, and really like to swing for the fences, then the new Direxion funds could be right for at least a small percentage of your trading money.

After all, if you've got the temerity to put your chips in the 2-beta pot, then why not take the next step and go for the triple?

Here's a quick rundown of Direxion's new 3-beta funds

Note: A special hat tip goes to my friend Tom Lydon of ETFTrends.com for the heads up on these triple-leveraged ETFs.

ETF Talk: Your Passport to Diversification

The same advantages of broad-based market funds that I shared in last week's ETF Talk also extend to international funds. Both kinds of ETFs provide diversification, low expense ratios, trading flexibility and tax efficiency through index investing. In addition, both also allow the use of limit orders and short selling.

With the U.S. economy in poor shape, it is now more important than ever to diversify strategically, and international ETFs could be especially useful in helping you to do so. When the stock markets recover, emerging markets likely will show the greatest gains. For that reason, I want to bring the iShares MSCI Emerging Markets (EEM) to your attention. It has about $12 billion in assets and offers the potential to soar when the markets recover.

Another fund to watch is the iShares MSCI EAFE Index Fund (EFA), with about $29.4 billion in assets. It contrasts with EEM by investing at least 90% of assets in the securities or investment instruments of the underlying index of developed international markets.

I also recommend becoming familiar with iShares FTSE/Xinhua China 25 Index (FXI). The fund generally invests at least 90% of its assets in the securities of the index or in American Depository Receipts (ADRs), Global Depository Receipts (GDRs) or Euro Depository Receipts (EDRs) that represent securities in the index. FXI also invests in other assets such as futures contracts, options on futures contracts, options, and swaps related to the index, as well as cash and cash equivalents.

Many financial advisors recommend investing at least 20% of your portfolio in overseas funds. That is not a bad idea at all. The reasoning is that those funds are supposed to rise and fall independently of the U.S. market. Well, there has been more correlation than not lately, with virtually all of the world's markets taking a big hit. However, not all of the markets will recover together. For that reason, exposure to foreign markets helps to offset domestic market swings.

I personally like broad-market international ETFs because of their sheer breadth and liquidity, low expense ratios and narrow bid-ask spreads. These characteristics make buying ETFs better values than foreign stock mutual funds.

In the past year, international ETFs have grown even faster than domestic ones. ETFs that offer international exposure are gaining popularity quickly among investors, according to the Investment Company Institute. In the 12-month period ended Oct. 31, total ETF assets rose 38% to $335.1 billion, while global ETFs nearly doubled to $82.8 billion.

Before you buy any international ETFs, here are a couple of other things to keep in mind. Some ETFs track only indices that have foreign stocks traded on U.S. exchanges. Others track indices based on foreign stock markets. What's the difference between the two varieties? ETFs that track foreign stocks traded on U.S. exchanges tend not to be as diversified as ETFs based on foreign markets. However, an advantage of buying a basket of ADRs is that the U.S. market usually has tighter and higher accounting standards than most foreign markets.

So, if you want some additional portfolio diversification, get your passport out and go international.

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 respond in a future ETF Talk.

Money Show Musings 6

I want to take a moment to thank the many subscribers to my Successful Investing advisory service who came up to me at the recent D.C. Money Show. There were so many of you who offered me your heartfelt personal thanks for the part I played in helping you escape the ravages of this bear market.

I can't really describe the full-extent of my gratification in helping so many of you survive this market downturn. I can only say that the pleasure and pride I take in helping you secure the fruits of your labor is akin to how a Major League Baseball player must feel when he knocks in the winning run that clinches a World Series victory.

You see, to me, giving out winning advice is like winning the World Series, the Super Bowl, the Indy 500 or the Admiral's Cup. This is what I do, and just like the professionals who seek the pinnacle in their respective sports, I too seek the pinnacle in my field of specialization.

My reward, however, is not a World Championship trophy. Rather, it's the trophies you give me in the form of your anecdotes -- anecdotes that tell me how happy you are to have retained your wealth even while trillions of dollars of worldwide wealth keep evaporating into the financial ether.

To this I salute you all, and thank you for bestowing such an honor upon me.

Oh, and if you couldn't make it to the D.C. Money Show, fear not. The PowerPoint slides and PDF workbook used in each of my seminars are available online by clicking here.

These workshops were filled to capacity, and I was really encouraged by the number of investors who now realize that ETFs are the best tools at your disposal to enhance your wealth in these difficult times.

If you don't know about ETFs, now is your chance to get up to speed and get in the race.

Resolve to Not Lose Money in 20010

The New Year is almost here, and soon we'll all be making our list of New Year's resolutions. I got a head start on mine for 2009, and here's just a sneak peak at what I want smart investors to resolve to do next year:

  1. I will prepare my family for a tough economic environment in 2009.
  2. I will have a positive increase in my liquid net worth in 2009.
  3. I will save in excess of 10% of my gross income in my retirement accounts.
  4. I will save and safely secure at least three months of living expenses.
  5. I will stop losing money on bad investments or bad investment advice.

Of all of these resolutions, perhaps the most important is the last one. You see, losing money on bad investments is perhaps the most frustrating thing that can ever happen to you.

To accomplish this goal, you need to adopt a new mindset. You need to adopt new investing techniques, and you need to get rid of and get out of bad investments as the market returns to rally mode.

Although there are many ways to make sure you don't lose money, one great technique is to set trailing stop losses on all of your invested positions.

Although the mechanism for setting a trailing stop loss varies depending on which brokerage you use to place your trades, the principle of a stop loss is the same everywhere and it shouldn't be thought of as complicated.

When you set a trailing stop loss on a new position, you are telling your brokerage firm to sell that position as soon as it falls whatever percentage you set from the buy cycle high. Let me explain.

If you purchase a stock or an ETF for a hypothetical $10 per share and you have placed a 10% trailing stop loss order on that purchase, the stock or ETF will be sold if it falls to $9 per share. If, however, the stock or ETF rises after your purchase to $20 a share, then comes back down to $18 per share, your position will be sold at $18 per share.

A trailing stop loss allows you to protect yourself from a quick dive in the share price of your security, and it allows you to protect your gains in the event that the security soars and then pulls back sharply.

If you are unsure of how to set a stop loss, then please consult the Web site of your online brokerage, or call your brokerage and ask them to provide you instructions on how to do so. Most online brokerage firms make it easy to set trailing stop losses, and you can do so whenever you purchase an ETF or common shares of stock.

Please take the time to learn how to set stop losses. In this fast-and-furious market, having a trailing stop loss in place is absolutely essential to making sound trading decisions.

Champagne Wisdom

"I drink it when I'm happy and when I'm sad.
Sometimes I drink it when I'm alone.
When I have company I consider it obligatory.
I trifle with it if I'm not hungry and I drink it when I am.
Otherwise I never touch it, unless I'm thirsty."

--Madame Lilly Bollinger, Bollinger Champagne House

With the holidays quickly approaching, you might want to remember the wise words of Champagne maker Lilly Bollinger. You see, there is nothing quite like a glass of bubbly to celebrate the season, so make sure you have plenty on hand to toast your good fortune, your family and your friends. Life is short, so why not make it special.

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

Test message.