Investor's Leverage for 7/17/12
by Mark Young
We bring you 30 years of investment and trading experience to help your portfolio prosper and to help you sleep soundly at night. No jargon. Just easily understood discussion of how we should approach the market and what strategies are likely to give us ample returns with limited risk and a very high probability of long-term success.
The Nitty Gritty
Long-term Market Status: Bull Market since 12/23/11
What this means: A Bull Market just means that the odds are a bit better that the market will trend higher, and if, for some reason, you get trapped in a position, the market will likely come back if you are patient. We make no prediction regarding the ultimate amount of market advance--this is just a condition. In this environment, investment quality, while still important, isn't so imperative--more volatile and perhaps faster growing investments need not be avoided. A Bull Market also means that one can be a bit more aggressive about picking bottoms during intermediate-term declines. Generally, toward the beginning of a Bull market condition, we should be no less than 50% invested, especially if valuations are low and risks are low. As a Bull market progresses, perceived risk actually decreases while actual risk increases. As a general rule, shorting is ill advised during Bull market, save as hedging tool.
Intermediate-term Trend: Bullish
Sentiment: Generally Constructive.
What actions to take: Adding to longs on weakness, maintaining a minimum of 50% exposure to stocks up to 100% in stocks, stock funds or index ETF's. Leverage may be used by more sophisticated investors, but this entails more risk. For our tracking account, we are ~50% invested and looking to add.
Mutual Funds and ETF's that we like: SPY, QQQQ, FEX (First Trust Large AlphaDEX), VOO (Vanguard S&P500), VB (Vanguard Index-Small Cap). All of these funds are long only and are not recommendations, per se. As an alternative and at half exposure levels the SSO (Profunds Ultra S&P--2X leverage long fund) and the SDS (Profunds Ultra Short S&P--2X leverage inverse fund) can be used by more experienced investors to free up capital or to manage exposure levels with tax efficiency.
Last time I said that more and more of our indicators had turned up and that the market definitely looked like it was in a solid up trend. Still, I wasn't upset by our 50% exposure. I explained that this market lacked a lot of pessimism to fuel a rally would tend to need to pause and "correct" periodically to regain "fuel". That and the general tendency for the market to get lazy at this time of year, led me to expect that we would get a pull back soon. And indeed we got one. It gave us a scare, but now things have turned back up. There's still some risk, however, and we are still in the negative part of the seasonal cycle, so, I'm OK waiting for a bit more pessimism to accumulate more long exposure. That may be too cute by half, but we already have some exposure the the market. Now, as we start getting closer to the election, things could well start heating up, so we're going to want to take advantage of any further correction that we may see in the coming weeks.
As we said last time, we will provide a quick advisory when we buy more, but you don't need to wait for us.
A quick look at this chart says, "Things look MUCH BETTER"
So, to recap, we are remain in a well-confirmed intermediate-term up trend, in a Bull Market. We can buy more at any time, but we will try to do so on a pull-back, and we will continue to hold at least 50% long, if not more.
Q: The market doesn't seem to be doing anything and the economy looks worse. While I'm still some time from retirement, I'm thinking that it would be easier to just put my money in secure Treasury Bonds. I mean, why not? At least I won't have to worry about losing money!
A: You'd think that T-bonds wouldn't have any risk, wouldn't you? Guaranteed by the full faith and credit of the US Government, and all. And the NOMINAL principle and interest ARE guaranteed by the US government. But the key term is NOMINAL. Sure, $100,000 in bonds yielding 2% is going to be "worth" $100,000 plus that $2,000 interest each year. The thing is, if food, housing and health care are all costing 100% more over the next 10 years, then that guarantee of your $100,000 didn't protect you from a 50% loss in buying power.
Take a look at this chart from the St. Louis Fed of the money supply.
This shows an unheard of expansion of the money supply. More money chasing the same amount of goods means INFLATION. Maybe a LOT of inflation. In fact, ShadowStats.com says that we've already got a lot more inflation than the Government is telling us about. And that creates a problem for those in the inflation-adjusted bonds (TIPS), as the adjustments aren't really reflecting the real inflation. I won't go into detail, but just look at your grocery bill. Mine is about 40% higher than it was 3 years ago.
My point here is that in this day and age, you can't just park money and assume there is NO risk associated. There IS RISK in EVERYTHING. Even those things that are supposed to be "secure". There's nothing at all wrong with bonds, either. One could have made quite a bit over the past several years, even though we're experiencing inflation and are virtually guaranteed to experience much more. The lesson is that we must have a risk reduction approach for ANY investment approach. We live in financially dangerous times. There is no place to put your money without putting it at some significant risk. You need to be aware and prepared. In fact, that's one of the reasons we thought it important to start this newsletter.
Side note: That money supply chart bodes well for stocks, long term.
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Long-term = Months to Years
Intermediate-term = Days to Months
Bear Market = A market which has suffered significant damage to its long-term trend, implying increased economic risk.
Bull Market = A market which is more likely to provide gains as prices increase with improved earnings.
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Investor's Leverage for 7/17/12
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