The broad market indexes remain in test mode for the S&P 500 and NASDAQ. They have been selling and then bouncing along the support lines, but not quite finding the catalyst to break lower. However, the negative sentiment is building through the mounting evidence that the global economies are struggling at best. The US economic data is weakening again and if the mounting fear continues to rise, whatever belief there is will erode and the markets will correct or test further on the downside. Thus, the need to manage the current risk relative to our outlook for growth or lack of. Today I want to put in perspective some concerns on the market horizon.
China is in the headlines today relative to slowing trade data again. April showed another drop in activity. This time it was much sharper than expected validating the demand for global goods is dropping. The exports rose 4.9% versus the 11% expected and the imports ros just 0.3% versus the 8.5% expected. This impact was on both import and export data brings us to the conclusion that the internal consumption/demand for China is dropping. This is a big negative for the near term outlook as the data continues to confirm a downward trajectory. Thus, owning China at this point is not on our agenda.
Treasury yields in the US continue to set new standards moving lower. The similarities to Japan continue to be raised and the questions to validity of actions by the Fed remain. There are two key ingredients to this action by Bernanke and the twelve dwarfs (Fed Presidents). First, the housing market stimulus is and was the primary reason for the action. Allow people to buy homes at affordable prices and stimulate the growth of a key economic sector. Second, the amount of money being borrowed by the Federal Government would demand less interest payment now and as the economy strengthened rates could rise again and the government could afford the increased debt with increased receipts from taxes. Neither is happening and rates continue to fall as money looks for safer havens due to market volatility.
Europe’s renewed social revolt against austerity measures via voting out those willing to take steps to control the damage. They have opted for those who will give them what they want regardless of the fact their isn’t any money to pay the bills. Greece and France are the latest victims of the transition and that has the world concerned about the outcome long term. However, the short term impact is relative to the bailouts continuing with Greece? Thus, the battle front is renewed relative to the sovereign concerns and the euro is declining versus the dollar strengthening. This is akin to a person smoking a cigarette sitting on a stack of dynamite. It might work out in the end, but the picture of what could happen is very clear.
I could list many more concerns, but this is getting a bit depressing. What we all really want to know is can we make money going forward? The answer is yes, if you are proactive at managing your money. Most investors tend to follow the noise pontificated from Wall Street versus looking at what is on the horizon, formulating an opinion relative to direction, and developing a strategy to benefit from directional movement of the market.
The broad markets have been in a defined uptrend since October 2011. It has come with plenty of volatility and challenges along the way, but has moved higher nonetheless. As briefly outlined above, there are more than a few issues facing the current financial markets. Thus, as investors we are always looking for the best place our money can reside with the least amount of risk relative to our goals and personal psychology. To keep this simple and in line with our discussion above, I want to take each instance and develop a potential investment strategy.
China is losing ground steadily relative to growth economically. Their economic data is declining and the outlook is for more of the same… simply put. If we want to be a salmon we could buy China believing the outlook is for improvement in the economic data and thus the opportunity to buy stocks cheaper today, and when things improve the prices will rise and my holdings benefit. However, if the economic data is right, the current trend of stocks are more likely to shift and drop before they rise, buying is not the best course of action based on that belief. We would rather avoid China all together or be short the country stocks. Therefore, our opinion is for stocks to decline in China relative to the data. Our time horizon is 6-12 months. FXI, iShares China 25 Index ETF shows an uptrend off the October lows contrary to our outlook. That uptrend was broken on higher selling volume on Wednesday which is a negative confirmation technically to the chart. If we want to be short the country as a result, we could buy FXP, ProShares UltraShort China 25 Index ETF. The fund is leveraged 200 percent and the risk should be accounted for by the amount of money we expose to such a fund as well as the volatility. A follow through on the current activity would confirm an entry point for the fund. Thus, we would define our entry, our exit/stop and our target before exposing any capital. Developing and opinion, defining a strategy and implementing the strategy with discipline is proactive money management.
We can do the same with Treasury bonds discussed above. TLT, iShares 20+ Treasury Bond ETF broke above resistance at $117.50 recently confirming the upside for the bond again. This is the second confirmation for owning these bonds in the last four weeks. The opinion is bond prices will rise or be flat over the next 6-12 months. We could collect a 3.1% dividend and potentially some appreciation as the broad markets decides on direction during the same time horizon. Again an example of putting our beliefs or opinions into action. Define the strategy and the discipline to capture the opportunity while planning for the worst case scenario… being wrong.
The final issue defined above facing investors was Europe falling due to the sovereign debt and political issues. IEV, iShares Europe 350 Index ETF broke support and the uptrend line in play off the October low this week. If our belief is the situation gets worse and stocks will continue to decline in the come 6-12 months we can do the same as we did with China, find a fund that allows up to invest in the inverse of the index or make money as the index declines. EPV, iShares UltraShort MSCI Europe ETF is a fund that does just that. Remember the leverage is 200 percent and should be accounted for in size of allocation and volatility. Define the entry, exit and target for the investment strategy. Again an example of putting our beliefs or opinions into action. Define the strategy and the discipline to capture the opportunity while planning for the worst case scenario… being wrong.
As an investor we all have opinions. The challenge is do we ever do anything about them or do we just talk? If you find yourself telling others what you think more than acting on your thoughts and beliefs, it may be time to reevaluate your investment strategy. The goal of investing is to make money, but at the heart of making money is having conviction about your investment portfolio. What better way to have conviction about your portfolio than to invest based on your beliefs with a disciplined strategy. Try it, it may change your entire outlook on investing.