Equities or Fixed Income Part Deux?

On May 2 I posted that you should consider using the QQQQ and consider avoiding IEF as the former (equities) was acting stronger and the latter (fixed income) was acting weaker. What a difference a few weeks make. Unlike some other financial news outlets, when we are wrong, we put it at the top, first thing. There is nothing wrong with being wrong when investing; the problem occurs by not admitting you are wrong. If something you do isn't working, or things go the opposite of what you thought they would, admit it and adjust accordingly.

So what happened over the past three weeks. First, international equities dropped out of favored status. Then, this week domestic equities fell out of favored status. Finally, equities have lost in relative strengths when compared to bonds. All together this means fixed income is an area to consider and for your equities you need to selective as we may see further weakness in that area. One thing to note, the correction earlier this year did not give us these levels of indications. This is why we feel there are increased risks at this point.

Finally, we have a subscriber service where we email out our portfolio as we adjust. I'm going to give a quick glimpse here as to how we are adjusting based on the above. We are reducing equity exposure to about 40% with the rest split between cash and investment grade bonds. We have one more bogey for equities and should that fail we will move down to between 0 and 25% equity exposure. If you are interested in learning more about the subscriber service, contact me and I can give you more information.

The Buck is Back

One rather significant event of the week was the Euro and, since the dollar index consists of over 50% comparison to the Euro, the US Dollar. The Euro broke a strong level of support at 125 and reached a level it hasn't see in over 4 years.

This may not be news to you and it may appear that the dollar/euro moved has become extended and a bit overcrowded. This may be true but this will not be a short term move. The dollar tends to trend in 6 - 10 year ranges. Over the past 20 years the dollar bottomed in 1992, followed by a 10 year up move that peaked in 2002, and bottomed again in March 2008 following 6 years of falling. It appears we are 2 years into a longer term up moved in the dollar.

How to play this dollar move?

Consider: PowerShares DB US Dollar Index Bullish Fund (UUP) This ETF tracks the US Dollar index and is a perfect way to play an up move in the dollar without having to trade in the currency market. As you can see from the chart, UUP does appear to be a bit extended here. Since we early on in a long term up move in the dollar, we see this as a longer term position. But, given the recent run up, we would consider buying a partial position here and then adding to it on a pullback to the mid $23 range.

Note: in the spirit of complete disclosure, we do not have a position in UUP but we do own another long dollar fund.

Avoid: CurrencyShares Euro Trust (FXE) As we stated above the Euro has broken all previous support at 125 and FXE, which tracks the Euro currency, is in a similar situation. There is no near term support in sight so any bounces from here will most likely be short lived. We would avoid FXE for the foreseeable future.

Flash Crash of 2010

The big news of the week is the “flash crash” that occurred Thursday between 2:40 and 3:00. There have been a number of rumors as to what the cause actually was from a fat finger of billion rather than million to computerized High Frequency Trading (HFT) programs. Of course Congress is demanding to know caused it. The official word is that there were no erroneous trades of that size, though it doesn’t mean it didn’t happen though I doubt it. I’m not saying that HFT didn’t impact it.

There are a lot more trading programs out there that run large numbers of trades in the time it takes us to think about the symbol to pull up a quote. But does that make it bad? It also has contributed to some of the volatility. But does that make it inherently bad? Has not the ability to place trades from out Blackberry or iPhone increased the speed with which you and I can place trades? This would also increase volatility but is it bad?

I heard a ten-minute recording of the floor of the S&P 500 futures pit. The S&P 500 futures are some of the most liquid securities out there and normally trade with a $0.10 bid/offer spread. During that time they had a $10.00 bid/offer spread or 100 times normal. What this boils down to is that there were a whole lot more people selling than there were buying. This is indicative of the fear that is still out there.

I have said we are 10 years into a secular bear market. These historically have run for about 16 years so we still have some time for it to run its course. This doesn’t mean we won’t have bull runs but you need to be cognizant of the environment.

Consider: It’s probably hard to want to consider an investment in the stock market right now but we do see domestic equities as a favored area of the market at this point. One ETF to consider is the Vanguard Extended Market VPER (VXF). This ETF covers small and mid cap stocks which are two strong areas of the domestic equity group. Short term support would be around 42 and below 37 we would be a seller. Good upside with a 54 target.

Avoid: iShares Europe 350 (IEV). IEV covers large the large cap European market. The European Union of course has been all over the news lately with troubles in Greece. But Greece is only the beginning of the problem countries known affectionately as the PIIGS: Portugal, Ireland, Italy, Greece and Spain. IEV broke its long-term support this week and is not clearly in a negative trend.

TSC is Bearish on Gold - or is it Bullish?

Regular readers of this blog and my newsletter are aware of my criticisms of a lot of the investment "advice" out there. Today I ran across a couple of articles from TheStreet.com that really exemplify why I have those criticisms.

On Sunday evening the following was posted: [video] Short Gold, Prices Will Hit $800 at TheStreet.com (Sun, May 2, 10:15PM EDT)

So, on Sunday at 10:00 PM they posted an article that gold was going to go down over $300. Fine. I may not agree with that but they have a reason for it.

Monday gold started the day just under $1180 and then promptly began to rise. At 10:12 AM they posted this: [video][video] Gold Prices Will Hit $1,200, Then Sell-Off TheStreet.com TV (Mon 10:12AM EDT)

So now, based on their articles, gold will go up and then go down. Interesting.

As gold continues to move up to almost $1190 Monday morning we get this from TSC: [video] Gold Prices To Reach $1,400 at TheStreet.com(Mon 12:17PM EDT)

So in a matter of 14 hours the articles on TheStreet.com went from totally bearish on gold saying it will go down over 30% to totally bullish and will go up 20%.

My question is, how does this help you invest? How could you have used this complete flip-flop to make money? Financial news is there to make money for themselves, mostly from advertising, not to make you money. Be aware of that when considering something based on what you hear or see on a major financial news channel.

Equities or Fixed Income?

This week I am introducing a new feature: one ETF worth considering and one I think you should be avoiding. I'll cover a wide range of ETFs including broad market, sector, country, currency and commodity, usually comparing two within the same theme.

This week I decided to address the broad market. We've seen an increase in volatility the past couple weeks and with increased volatility comes increased fear.

Consider: PowerShares QQQ (QQQQ) The QQQQ is one of the stronger market ETFs right now and has held up relatively well over the past two weeks. The first area of concern is 48.75, then 47.50. At 45 we concerned going forward. Know your risk level and evaluate accordingly.

Avoid: iShares Barclays 7-10 Year Treasury Bond Fund (IEF) The Treasury Bond market has been and continues to be weak. While in times of volatility money tends to flow to bonds, at this time there is no indication of Treasuries taking a position of leadership.