Making Money Alert
Will May Gray Turn into June Gloom?
06/02/2010
Volatility and wild market swings have become commonplace during the past several weeks. But if we take a look at the markets for the entire month of May, the picture looks mighty gray.
In what best can be described as an extremely melancholy month for the market, May saw the Dow drop 7.92%, and the S&P 500 sink 8.2%. The NASDAQ Composite was the worst of the three major indices in May, plunging 8.29%.
As you can see by the charts below of our “four horsemen” -- the S&P 500, the 30-Year Treasury yield, the U.S. Dollar Index and the iShares FTSE/Xinhua China 25 -- it’s been a very busy, and very volatile, month for all.
The big news with the S&P 500 is that it descended below its long-term, 200-day moving average (red line). This breakdown in the S&P 500 -- along with other factors that comprise the Fabian Plan -- prompted my Successful Investing advisory service to issue a sell signal in domestic equity funds.
There was a flight to quality in Treasury bonds due to all of the turmoil in the equity markets and in Europe, and that caused Treasury bond yields to plunge, as can be seen here by the chart of TYX.
The flight to quality continued in the U.S. dollar, as the greenback gained significant ground on rival foreign currencies in May. When the euro is shaky, you want your capital to be in dollars, and that’s precisely where investors headed last month.
Finally, China’s woes continue, as seen here by the index that measures the nation’s top 25 Shanghai listed equities. Here, too, we see the extreme volatility in Chinese stocks since the beginning of the year.
So, will the May gray turn into June gloom for equities? Will we see a reversal of fortune in Treasury bonds and in China? I hesitate to make a prediction here on the fate of the four horsemen; however, one prediction I think I definitely can make with confidence is that there will be a lot of volatility on whatever path this market decides to take -- so please, please, please, whatever you do, be very careful.
The Bear Goes International
If there were any doubt that the bear has reared his vicious head in international markets, then those doubts should be erased when we check out the iShares MSCI EAFE Index (EFA). This exchange-traded fund (ETF) measures the performance of markets in Europe, Australasia and the Far East.
As you can see, EFA has come down nearly 20% from its April high, a very harsh down move in just more than six weeks. This bearish sell-off easily took out technical support at both the 50- and 200-day moving averages.
As fiscal turmoil continues to reign supreme in Europe, I think we are liable to see EFA remain well below its long-term trend line. Now, that’s not to say that short-term bargain hunters won’t step into the stock looking for a quick trade. The possibility of a trading bounce in battered EFA is indeed there.
However, if you are anything other than a very short-term investor, I recommend that you steer clear of the international bear. As we’ve seen since early April, his bite can be really nasty.
ETF Talk: Profiting from the Fall of Financials
The idea behind shorting equities is to profit when their prices are falling. Since markets tend to rise historically, you need to pick your spots for shorting carefully. The challenge, of course, is to know when to short -- and when to cover that short.
I recently notched double-digit percentage gains by taking a short position in financial stocks through the ProShares UltraShort Financials (SKF). This ETF is designed to profit twice as fast as the declining value of the Dow Jones U.S. Financial Index falls.
The power of leverage in a fast-moving market can help to boost gains quickly. Of course, the flipside to this leverage is that an investor can absorb losses equally as fast when the market’s direction goes against expectations.
The short-term direction of this market right now is highly uncertain, and highly volatile. Fears surrounding Greece’s debt crisis and the possibility of its spread throughout the eurozone to other deficit-running countries have made markets very jittery. Those fears became more intense after the Bank of Spain bailed out a small regional bank, raising concerns of a systematic crash, much like we saw in 2008 after the Lehman Brothers collapse.
In light of these developments, I made a decision on May 10 to take a position in SKF. I recommended SKF in my ETF Trader service, and I then advised my subscribers to sell the position just two weeks later on May 21, booking profits of more than 16%. I still don’t think this sector’s problems are over, but I certainly did not want to let a double-digit percentage gain in just a couple of weeks slip away. I suspect we’ll see more downside in financials in the coming weeks, and that could mean additional gains for SKF.
If you want my advice about buying and selling specific ETFs, or if you’re open to the potential of booking 16% gains in two weeks, then I invite you to check out my ETF Trader advisory service.
Get Your Monthly ETF Intelligence Report Today
As regular readers of the Alert know, I am a huge fan of ETFs. An ETF is like a virtual basket of stocks that usually tracks a specific index or sector. To put it another way, ETFs are like a homologous species of mutual funds that allow investors to buy into a specific area of the market without all of the hassles, management fees and trading restrictions imposed by traditional mutual funds. You could say that ETFs are a kind of mutual fund without any of the downsides.
There are quite a few ETFs out there to choose from, and keeping track of them all can become a titanic task. However, that task has just been made easier with my new, FREE May ETF Intelligence Report.
This report groups the universe of ETF offerings by investment objective, sector and country. These data-rich listings tell you the name of the ETF; its ticker symbol; the most recent closing price; and the percentage change in price for the past one week, one month and three months.
You’ll also get the current year-to-date price movement; percentage the ETF is below its all-time high; and where the ETF stands in relation to its 50- and 200-day moving averages. Lastly, we have included the average daily trading volume for each fund.
Armed with this extensive information on virtually the entire ETF universe, you’ll be able to glean a really sharp picture of what sectors, countries and types of ETFs currently are outperforming their peers. Perusing this extensive list of ETFs should give you a real sense of what’s happening -- not only in the domestic market, but all over the globe.
To get your May ETF Intelligence Report, simply click here.
Character, Carbon and Steel
“Persistence is to the character of man as carbon is to steel.”
--Napoleon Hill
Some people have a beautiful knack for putting together pithy pearls of wisdom, and there is nobody better at this skill than motivational theorist Napoleon Hill. Here, Hill’s poignant analogy demonstrates with great economy the role of persistence in our lives. So, the next time you’re feeling unmotivated, just remember how important persistence really is to the great causes of productive achievement, happiness and success.
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
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.