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We Prepared You for September's Market Swoon – Are You Ready for What's Next?
We warned you last month that September, not October, is statistically the worst-performing month for the stock market. We also told you why this September would be particularly bad. But most importantly, we told you what steps to take to guard your investments.
Well, now that September is fully in the books you can see that our concern was justified.
The Dow Jones Industrial Average fell 5% for the month, far exceeding the average 1.07% loss the index has seen in September since its 1896 launch. The other months have averaged a 0.71% gain.
That 1.87-point spread is considered by mathematicians to be "statistically significant at the 95% confidence level."
But this September had more going against it than a bleak history. With so much detrimental news weighing on investors' minds, from the Greek debt crisis to weak U.S. economic data to concern that the U.S. Federal Reserve has run out of policy options, a September market swoon was inevitable.
Most of the ugliness was confined to a handful of really bad days. The Dow actually rose on 11 of 21 trading days in September, but on the days it fell, it fell hard. Six of the down days recorded drops in excess of 200 points.
But as bad as this September market swoon was, however, it was no surprise to readers of Money Morning or its new sister service, Private Briefing.
In the Sept.1 Private Briefing report "Investment Plays for the Current Economy," Executive Editor Bill Patalon not only warned readers of what was to come, his interview with Money Morning Global Investment Strategist Martin Hutchinson laid out a "safety-first" investing strategy to help readers protect their portfolios.
Although September is over, many of the negatives that have caused the market swoon in recent weeks haven't changed. And the craziness isn't going to stop any time soon.
The Case for a Short-Term Market Rally – And How to Play It
The short-term market rally we've seen over the past week represents fresh opportunities to profit, but be forewarned – it won't last.
The Dow Jones Industrial Average on Monday rallied 272 points, or 2.5%, and followed with another 148-point, or 1.34%, gain on Tuesday. That's after last week's 738-point, or 6.4%, tumble. The Standard & Poor's 500 Index is up 3.4% this week after last week's 6.5% fall.
Money Morning Chief Investment Strategist Keith Fitz-Gerald knows why the short-term rally is happening – and how investors can best to take advantage of it.
"I can make a case for a short-term rally that may build through the end of the week or even longer, now that the markets have gotten their ya-ya's out via the vicious selling of recent days," Fitz-Gerald said.
According to Fitz-Gerald, there are three things that could fuel a brief stock market rally:
- We're coming up on the end of the quarter. Given the massive over-performance of bonds over the past 12 to 24 months, the bulk of the institutions are likely to rebalance their portfolios by buying equities — probably dividends and energy.
- The end of the year is in sight, too. That speaks to a practice called "window dressing," which are changes to a portfolio that institutional managers make to spruce up their quarterly client statements, while bolstering their bonuses if possible.
- The markets are very oversold, technically speaking, and that lights a fire under Wall Street's feet with regard to the timing. The markets historically want to reward underperformers. That's why the fear of missing further gains could pull more money into the game short-term.
So what can an investor do with this short-term market rally? Fitz-Gerald has several suggestions:
Prepare to Profit From the Next Stock Market Crash
The notion of a stock market crash is a terrifying thought for most investors.
But it shouldn't be.
After all, stock market crashes, properly played, can be just as profitable – if not more so – than bull-runs.
Of course, the trick to profiting from stock market crashes is predicting them.
That's where I can help.
You see, a relatively simple analysis shows that the Dow Jones Industrial Average has gotten ahead of itself. More than that, it's giving a pretty clear signal about where the blue-chip benchmark is headed.
Let me explain …
A Market Mismatch
Despite any recent losses the stock market is still extremely high by historical standards.
Remember, it wasn't so long ago – February 1995 – that the Dow first passed 4,000. That was thought to be a pretty high level at the time, as it was almost 50% higher than the 1987 peak.
The Dow closed yesterday (Monday) at 11,043.56, which is inconsistent with economic growth prospects.
That is, nominal gross domestic product (GDP) in the second quarter of 2011 was up 105% from the first quarter of 1995. So if you assume that the stock market over time should follow national output, then a middling level for the Dow today would be about 8,200 – more than 2,500 points below the present level.
And keep in mind that that's a middling level – not a bear market.
If you want an idea of how far the Dow might slump in a bear market, you can take the 777 at which the index stood in August 1982 – before the great bull market began – and inflate it by the progress of GDP since then. If you do that, you get a bear- market target of about 3,600 for the Dow.
Incidentally, a few years ago I met Kevin Hassett, the AEI scholar, who along with James Glassman wrote a book in 1999 called "Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market." He's a very nice guy. I made a bet with him that the Dow will reach 3,600 before it gets to 36,000. He's teased me about it since saying I lost my chance, but it looks as though I may get him yet.
A Matter of Motivation
The stock market may be significantly higher than it was in 1995, but I assure you our economy is no better off.
Why Investors Relish Corporate Spin-offs
Corporate spin-offs, though not as sexy as mergers or initial public offerings (IPOs), often reward stockholders of both the parent and offspring companies – if they're patient.
In fact, the stocks of 60% of spin-off companies end up in positive territory one year after a split, according to London-based The Spin-off Report.
"There's value in the [spin-off] company prior to the event that generally gets missed," said Ryan Mendy, Chief Operating Officer of The Spin-off Report.
After some slow years during the market downturn of 2008-2009, corporate spin-off activity has revived.
Globally there have been 46 spin-offs of companies valued at over $250 million this year, according to The Spin-off Report. That compares with 36 last year and just 27 in 2009.
Tyco is actually splitting into three pieces, which analysts estimate could boost shareholder value by 60%.
"The idea is to create smaller and more focused businesses," J. Randall Woolridge, finance professor atPenn State University, told USA Today.
Both spin-offs and their parents tend to outperform the market. According to a study done by The Spin-off Report of more than 500 corporate spin-offs between 2000 and 2010, the stocks of 58% of the parents and 60% of the spin-offs were up after one year.
Better yet, they were up significantly. The parent companies climbed more than 17% on average and the spin-offs themselves soared more than 24%.
From Rogues to Riches: How ETFs are Lining Wall Street's Pockets – While Picking Yours
Maybe you didn't know that the rogue trader at UBS AG (NYSE: UBS) who lost $2.3 billion last week was trading exchange-traded funds (ETFs). Or that Jerome Kerviel, another rogue trader at Societe Generale SA (PINK ADR: SCGLY) who lost $7.2 billion in 2008, was trading ETFs.
Maybe you didn't know that ETF trading accounts for 35% to 40% of all exchange volume, according to Morningstar Inc. (Nasdaq: MORN).
Maybe you didn't know that the U.S. Securities and Exchange Commission (SEC), the U.S. Commodity Futures Trading Commission (CFTC), the Financial Stability Board (FSB) and the Bank of England (BOE) are each concerned that ETFs pose potential systemic risks.
Maybe what you don't know can actually hurt you.
ETFs: Growing Popularity, Growing Danger?
Just when you thought that exchange-traded funds were a simple, smart and safe way to diversify out of underperforming stock-and-bond mutual funds, along comes reality.
What these regulators and financial- stability oversight agencies are increasingly worried about is whether Wall Street's presumed good intention in creating these hugely popular investment vehicles is being undermined by unintended consequences.
But, let's not forget, we're talking about Wall Street, where unintended consequences are a rarity. The reality is that ETFs were originally conceived – and are increasingly being engineered – to ratchet up trading for the Street's own benefit.
And while you may not think that affects your investing or trading of ETFs, or your portfolio-diversification plans, you'll be surprised – and maybe even alarmed – to learn that you're wrong.
Let me explain …
Instruments of Diversification … Or Disaster?
ETFs started out as tradable alternatives to mutual funds. Initially, product portfolios consisted of stocks, or baskets of stocks, that replicated such key indexes as the Dow Jones Industrial Average, the Standard & Poor's 500, or the Nasdaq Composite Index.
The idea was to offer products that mirrored benchmarks – and that traded all day, like stocks. The tradability of these instruments offers effective liquidity that conventional mutual funds lack , with the added benefit that ETFs would also be easy to short.
Product offerings multiplied quickly. In addition to exchange-traded funds based on stocks, product sponsors created ETFs that replicated oil-and-gas, gold-and-silver and diversified-commodities portfolios – all of which were based on futures contracts.
A lot of ETFs started out as a cheaper alternative to futures trading. Futures traders must cover high initial-margin deposits. And positions are marked-to-market daily, which requires immediate additional margin coverage when losses arise. The upshot: f utures trading is too expensive and too volatile for investors who are used to traditional stock market investing.
Today, investors can find exchange-traded funds that offer exposure to all kinds of risk instruments – from currencies and bonds, to thin slices of the yield curve and volatility. And there are even "leveraged" and "inverse" ETFs that multiply risk exposure and allow traders to make all kinds of directional bets.
We Warned You U.S. Stocks Could Plunge – Here's the Safety Play You Need to Make Now
U.S. stocks reversed course in the final minutes of trading yesterday (Monday) to push the Dow Jones Industrial Average back over 11,000 – but that still wasn't enough to make a dent in the index's 4.8% loss so far this month.
Europe debt fears and dismal economic news have caused the Dow to fall in five of this month's seven trading sessions, each time by more than 100 points.
We warned you September would be a tough market month – several times.
What's more, we showed you how to protect yourself.
How You Can Beat 'The Street'
I can't tell you how many times during the ugly trading days we've seen in recent weeks that I've heard someone say that the little guy can no longer compete – that he or she can't beat "The Street' – in today's stock market.
In fact, I hear it all the time: Wall Street has rigged the game, has turned Washington into its lapdog, and only wants to separate the retail investor from his or her money.
I guess such defeatist sentiments are understandable – especially on days like Thursday when the Dow Jones Industrial Average plunges more than 419 points. But they're also misguided.
You see, while most retail investors believe that they can't beat The Street because the "little guy" is disadvantaged, I hold just the opposite view. I know you can beat The Street, and beat the Big Boys at their own game, precisely because you are the "little guy."
How do I know this? Simple. I've helped tens of thousands of investors around the world do just that.
So let's deep-six the defeatist attitude and get down to business: The person who can most help your bid to outfox Wall Street is the one who's looking back at you from the mirror every morning. Just remember:
1) The playing field is level – even if you think it's not.
2) Small investors can be more nimble.
3) Professionals face risks that you don't have.
4) A proven portfolio approach can make you steadier than the markets.
5) You need to have the courage to participate to get started.
It's a Better Playing Field Than You Think
The typical personal computer available to retail investors has more power than the entire NASA Apollo Mission profile and the data you can pull off the Internet is truly stunning.
How I Made 52% Off the Last Stock Crisis
Man, what a week, right?
We all watched the world markets take a pretty bad beating. The Dow Jones Industrial Average plunged a horrific 635 points Monday and another 520 points on Wednesday, taking the blue-chip index to a level it hasn't seen since last September.
Markets in Europe and Asia tumbled as well, leaving investors shell-shocked.
It reminds me of how the markets reacted after the 2008 collapse of Lehman Brothers Holdings Inc. (PINK: LEHMQ).
Investors panicked. They dumped nearly everything. Stocks fell 29% in three months. Commodities fell an incredible 47% that autumn.
At the time, you couldn't turn on even the local news without hearing something negative about the markets.
But I'll let you in on a secret: I loved every minute of it.
I made a nice 52% profit in my personal forex account that fall, all thanks to the increased volatility in the markets.
Yes, the very thing that sunk stock and commodity prices caused my forex trades to soar higher and faster than ever.
It wasn't an isolated event, either. There are plenty of ways you can profit from volatile swings in the stock markets with foreign currencies.
Take now, for instance. As of this week, volatility has emerged in the markets with a vengeance. But that's exactly the kind of volatility that rewards traders. In just a moment, I'm going to show you how to use this volatility to your advantage.
Don't Get Suckered by Wall Street's Wimpy Gold Price Forecasts
I was scanning the news wires in search of a particular item late last week when a story caught my eye: It seems that Newmont Mining Corp. (NYSE: NEM), the world's No.2 gold producer, believes that the burgeoning demand from Asia's newly minted middle class will send the yellow metal up to $1,600 this year and even higher in 2011.
The Newmont story reminded me of another news item that I'd read just days before – a news-service poll of analysts that said that the current Wall Street consensus was for gold prices to reach $1,700 an ounce in 2015.
What a joke.
You see, just a few months back, when gold and silver prices seemed like they were jumping every day, Wall Street and the other Big Boys were blitzing us with messages explaining why we "had to" buy gold.
You heard it on the radio. You read it online. You saw it on the nightly news. We were even inundated with those late-night infomercials or "junk-mail" packets that detailed the benefits of those funky "collector coins" (including some that were "individually hand painted," no less!).
Gold was going to $2,500, $5,000 or even $10,000. And only fools weren't in gold – or so they claimed.
But when gold prices stopped running, so did Wall Street's aggressive forecasts. In fact, we've basically seen an about-face – as if the Big Boys are now low-balling their gold price forecasts.
Don't get suckered.
If you buy what Wall Street is selling right now, you'll lose in a big way – twice. You'll miss out on the major profits that will come when gold prices run up to their inevitable new highs. And – perhaps even worse – you'll get left behind and find your buying power eroded in a big way when the inevitable harsh inflationary pressures ultimately take hold.