Making Money Alert
Welcome to Market Purgatory
02/09/2010
To say that the bears have been firmly in control of the equity markets during the past several weeks would be stating the obvious. However, the sharp decline we’ve witnessed in the broad market hasn’t been straight down. The market has experienced several volatile turnaround days, including last Friday and again on Tuesday. In fact, the volatility we’ve witnessed over the past two weeks has placed stocks in what I call “market purgatory.”
Stocks now are trading right between their short-term, 50-day moving average and their long-term, 200-day moving average. This market purgatory can be seen here in the chart below of the S&P 500 Index.
As you can see, the S&P 500 now trades right below the 50-day average (blue line), and right above the 200-day moving average (red line). This midway point for the stocks between short- and long-term trends begets the question -- what’s next?
Well, I think a great case could be made that we now are going to experience some buying that takes us back up to the 50-day average. Yet, an equally strong case can be made for further declines all the way down to the 200-day average.
I admit that I don’t know for certain which camp will be proven right, and until I start to see a strong trend forming either way, I recommend that you stay patient with any new money you want to invest.
Believe me, there will be plenty of opportunities to jump back into equities on the long side, or on the short side, when this market finally chooses whether it wants to keep running with the bulls, or start rolling around in the dirt with the bears.
Another Failure of the State
By now, all of us know about troubled Toyota Motor Co. and its massive recall issues. But on Tuesday, we found out that way back in late 2007, officials at the National Highway Traffic Safety Administration (NHTSA) actually knew about this problem.
According to an Associated Press story, State Farm insurance said it noticed an uptick in reports of unwanted acceleration in Toyotas from its large customer database and warned the NHTSA in late 2007. NHTSA officials said the report was reviewed and the agency issued a recall later that month.
But according to the AP report, NHTSA received complaints about acceleration problems in Toyota vehicles as early as 2003, and now congressional investigators are looking into whether the government missed warning signs of the problems.
The news came on the eve of a scheduled congressional hearing into the Toyota recalls planned for today, but that hearing was postponed because of the snowstorm slamming the Washington, D.C., metro area.
What I think we are seeing here is yet another failure of the state to act in defense of its citizens. Certainly, the bulk of the blame for Toyota’s problems should be placed squarely on the shoulders of Toyota. But why do we have an NHTSA if it fails to act on something as serious as stuck accelerator pedals?
The Taxes Are Coming, the Taxes Are Coming!
President Obama just submitted a new, 10-year federal budget that has me very worried. The primary reason for my concern is tax hikes. As I expected, the mammoth $3.8-trillion budget for the next fiscal year raises taxes on businesses and upper-income households by $2 trillion over 10 years. And after what could be called very minor spending cuts, the country still will face $8.5 trillion in added debt during the next decade.
The budget for fiscal 2011 imposes nearly $1 trillion in tax increases on families with incomes above $250,000 during the next 10 years, and it does so by allowing the Bush tax cuts to expire. That’s income, mind you, and not take-home pay or profits. That means a small businessperson with income of $250,000 or more would pay a much bigger portion of that income to Uncle Sam. And because most of the jobs created in this country are produced by small businesses penalized by the new taxes, I think we can safely say that this budget is not conducive to job growth.
How much will taxes go up? Well, the two top income-tax brackets would rise to 36% and 39.6%, from 33% and 35%, respectively. For families earning more than what the president thinks is a mystical sum of $250,000 per year, capital gains and dividend tax rates would rise to 20% from 15%. According to The Wall Street Journal, upper-income families would face $969 billion in higher taxes between 2011 and 2020.
To put it quite simply -- the taxes are coming, the taxes are coming, and it’s your job as a smart citizen to make sure you take steps to keep your tax liabilities as low as legally possible.
If you don’t already have a good CPA, then I highly recommend you consult with one soon, especially now that tax season is here.
ETF Talk: Let's Get Back to Basics
I thought that this week we should review some of the basic "rules" behind investing in exchange-traded funds (ETFs). I have been touting ETFs as excellent investment growth vehicles, but anything that is new to you can be a little tricky.
Rule One: Diversification
ETFs are flexible investments -- you can buy options, go short, and hedge. ETFs also let you invest in a variety of sectors and trends without the risk of single-stock exposure. In fact, some international ETFs give you exposure to stocks or entire sectors that can't be bought in U.S markets. Let's face it, ETFs offer diversity -- if your goal is to have a mix of assets, ETFs let you do this simply and cheaply.
Rule Two: Explore Your Options
Remember, just because ETFs have stock-like properties doesn't mean that you are confined to investing in equities. ETFs let you bet on almost anything that can be tracked by an index.
Since the economic downturn, it has become wise to look into alternatives to stocks, namely bonds and currencies. Through ETFs, you can focus on corporate bond indices and/or inflation-protected Treasuries. You can buy ETFs that short the British pound sterling, are bullish on the Japanese yen, etc. There are even ETFs out there that let you buy a basket of currencies ranging from the Indian rupee to the Swedish kroner.
Another alternative to stocks could be to keep part of your portfolio in cash. Instead of using money market funds, you could invest in short-term bond ETFs, which often pay double or triple what money market funds yield.
Rule Three: Keep an Eye on Trends, and Moving Averages
I like to isolate trends in the market by observing both the 50- and 200-day moving averages to know when to buy and sell. The moving averages remove the "noise" in stock prices. When a stock breaks above or below its 50-day average, the short-term trend has been broken. When the ETF falls below its 200-day average, it is time to sell.
Rule Four: Set Reasonable Stop Losses
This rule is more technical than strategic. To lock in your profits and limit losses, you must set reasonable stop prices or trailing stop losses, depending on the pick. If you have a trailing stop loss in place, you will be protected if the price of your ETF soars and then suddenly dives.
Rule Five: Watch for Minimum Trading Volume
Another important thing to remember while trading ETFs is to watch for trading volume. You want to invest only in ETFs that have a daily trading volume of at least 100,000 shares. Remember, the higher the volume, the more liquid the ETF. A fund with low trading volume could leave you vulnerable to wider swings in the share price during volatile times.
Well, there certainly is more to know about ETFs, but you now have some basic rules to follow. It never hurts to remember the fundamentals of ETF investing, whether you are an experienced investor or just trying to get started. In a volatile market, knowledge and caution gain heightened value.
If you want advice about which ETFs to buy and to sell, please sign up for my ETF Trader service by clicking here. As always, I am pleased to answer your questions about ETFs, so do not hesitate to reach out to me if you have one. To send an ETF question to me, simply click here. You may see your question answered in a future ETF Talk.
Mutual Funds Are Hazardous to Your Wealth -- 2/9/2010
The market sold off sharply in the second half of January, and this rapid descent has me very concerned for investors holding large allocations to domestic, international and high-yield mutual funds.
What we could be seeing here is the start of a more prolonged correction in the markets. The end of this market rally -- what I call the equity endgame -- is one of the 2010 investment themes that I have been talking about recently on my radio show.
Now more than ever, I believe it’s crucial that you take a hard look at your portfolio to determine which of your mutual funds are most susceptible to a widespread market decline.
Remember, it was just over a year ago that most investors sustained serious damage to their wealth -- damage that, in many cases, will be extremely difficult to overcome. Certainly Wall Street titans, reckless lenders and irresponsible home buyers all deserve their share of the blame for the market’s meltdown. But one part of the financial world that hasn’t received much scrutiny for its role in that evaporation of investor wealth is the mutual fund industry.
In my latest special report, "Mutual Funds Are Hazardous to Your Wealth," I expose the five serious flaws inherent in these investment vehicles. I also tell you why exchange-traded funds (ETFs) are far superior alternatives to traditional mutual funds.
Some of the reasons why I love ETFs are their low cost, diversification and transparency -- virtues key to any successful portfolio. For most people looking to grow their serious money over the long term, ETFs are quite simply the best investment vehicles available today.
To get your FREE special report, "Mutual Funds are Hazardous to Your Wealth," simply click here.
NOTE: Fabian Wealth Strategies is a SEC registered investment adviser, and is not affiliated with Eagle Publishing.
The Virtue of New Ideas
“Be not astonished at new ideas; for it is well known to you that a thing does not therefore cease to be true because it is not accepted by many.”
-- Baruch Spinoza
The Dutch philosopher reminds us all that just because the public hasn’t yet accepted an idea, it doesn’t mean that idea isn’t correct. In fact, the entire history of human progress consists of brilliant new ideas that were laughed at or even scorned initially, then eventually embraced and accepted for their truth.
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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