Now terms like “buy and harvest” and “buy and trade” have replaced the old “buy and forget” philosophy once so popular among active stock market investors.

The change reflects a spreading attitude that in an age of 24/7 financial news and information, which can mean tremendous volatility, it no longer makes sense to buy a stock and then check back on its performance five, seven or ten years later.

“The buy-and-hold and passive investing approach works really well in certain environments and not so well in other environments. The ’80s and the ’90s were a good time for buy-and-hold,” says Matt Havens, partner with Global Vision Advisors in Hingham, Mass. “There’s benefit now to being more active in your management style.”

Investors who held tight during the contagion of the credit crisis saw their portfolios decimated by the market’s multiple gyrations that generated losses of more than 50 percent for the major indexes. Even the most bullish of investors acknowledge it will take years before the market returns to its record levels of October 2007.

At the same time, those who were nimble enough to get in and out of positions at least gave themselves a chance to mitigate losses.

Emily Sanders, president of Sanders Financial Management in Atlanta, uses General Electric (NYSE: ge) (CNBC.com’s parent company) as an example of how its “buy- and-trade” strategy has worked.

At its worst, GE shares had lost 82 percent of their value, before investors became convinced the company could regain its footing and overcome losses sustained primarily at its GE Capital financing arm. Since the March low the stock has more than doubled in price

“When something like GE presents trading opportunities due to severe gyrations, then it really calls into question the whole buy-and-hold-and-forget-about-it strategy,” Sanders says. “You can’t forget about anything. Nothing can be taken for granted, not even in the soundest companies.”

At the same time, though, trying to pin the tail on a stock that is in free fall may not be that feasible for a typical retail investor.

Most portfolio managers shudder at attempts to try to time the market as a whole and even particular stocks, choosing instead to find value levels or technical points - or sometimes a combination of both - to determine when to buy and sell.

Meanwhile, the individual investor has to decide whether to follow the strategy employed during the massive bull markets of the late 20^th century and avoid even looking at daily stock quotes, or confront today’s reality of volatility sometimes four and five times higher than historical norms.

“The definition of buy-and-hold tends to be a little fuzzy,” says John Buckingham, chief investment officer at value-based Al Frank Asset Management in Laguna Beach, Calif. “A lot of people think that means you buy something and do nothing for years on end. That’s not a strategy we’ve ever implemented.”

Yet Buckingham would include himself in the buy-and-hold camp - sort of.

Buckingham describes his firm’s strategy as “buy and harvest,” a term that he says entails a long-term investment horizon but with the flexibility to be “following the money.”

“The strategy is sound–buying undervalued stocks and selling overvalued stocks,” he says. “Unfortunately, some people will confuse that with buy-and-forget as opposed to buy-and-continue-to-monitor.”

“In this volatile environment, you can have financial stocks that appreciate 100 percent in a week,” explains Buckingham. “To not try and take advantage of a move like that, you’re not doing your job as an active manager.”

But if “buy and harvest” with an active manager is still beyond one’s appetite for risk, there’s always the passive management strategy advocated by Charles Massimo of CJM Fiscal Management in Melville, N.J.

Even at CJM, though, “buy-and-hold is only part of the equation,” admits Massimo.

Portfolio rebalancing that reflects investor priorities is the key, so the thinking goes. Maintaining a balanced and diverse investment outlook takes precedence over following market gyrations, so that goals are met and risk is minimized.

That means if bonds should do especially well during a particular period, that asset class naturally would take on greater weight in the portfolio. Subsequent rebalancing would shift the portfolio more towards equities, allowing investors to take profits from the growth in bonds while positioning for a gain in stocks - “buy and hold and rebalance” as it were.

“What that accomplishes is the client never takes on more risk than they agreed upon,” Massimo says. “The second thing it forces us to do is to sell high and buy low, because we’re selling that asset class that performed best and rebalancing towards the asset class that performed worst.”

At the core of such a philosophy is a belief that what goes up eventually comes down and vice versa.

“Nobody was rethinking anything when the market was going up, and now that markets are doing what they often do - go down - all of a sudden everything is out the window, and I think that’s ridiculous,” says Matthew Kaufler, equity analyst and portfolio manager at Federated Clover Capital Advisors in Rochester, N.Y. “You don’t shoot your favorite dog just because he’s old.”

To the contrary, says Kaufler, who believes that a market pullback is time to add to positions of good companies that get beaten down - “buy and hold and buy the dips,” perhaps.

For some managers, though, what it all comes down to is finding the best way to make money without letting emotions interfere. So, if that is buy and hold or buy and harvest or buy and ask the computer, then so be it.

“Without a crystal ball, I think investors still need to have a more active approach, but with the caveat that it’s going to be an approach that’s systematic to the extent that your emotions do not factor into the decision of whether you buy and sell,” says Matthew Tuttle, president of Tuttle Wealth Management in Stamford, Conn.

Tuttle relies on computer software to tell him what to do. “We take all of our creativity and all of our discretion and we design computer programs, and the computer programs tell us when to buy and when to sell,” he says. “The queasier I am when the computer tells me to do something, that’s usually when we’re going to make the most money.”

]]> http://gtsnyc.com/blog/?feed=rss2&p=54 http://gtsnyc.com/blog/?p=52 http://gtsnyc.com/blog/?p=52#comments Tue, 19 May 2009 20:45:14 +0000 admin http://gtsnyc.com/blog/?p=52 From October 2007 to March 2009, many got to experience firsthand the ‘for worse’ part of buy-and-hold investing. The Dow Jones (NYSEArca: DIA - News) lost 7.839 points or 54.90%.

Just before being snuffed out entirely, hope returned to Wall Street. Since the March lows, the Dow has rallied as much as 2.217 points. Patiently waiting for portfolios to recover all their losses has once again become a viable option.

Sobering facts

Despite the recent rally, which lifted the Dow by as much as 34.43% and the S&P 500 (NYSEArca: SPY - News) by as much as 28.31%, there is a long road ahead to reach the break-even point. Based on Dow 8,200, the stock market would have to rally another 72% just to reach October 2007 levels.

Even at an optimistic 12% annual return, it would take nearly five years for the broad market to recover to previous bull market levels. Chances are that the Financial Select Sector SPDRs (NYSEArca: XLF - News) won’t even come close to their high watermark within the next 10-20 years. This may sound absurd, but we’ve seen what happened to tech stocks after the dot.com bubble.

After briefly poking above 5,000 in March 2000, the Nasdaq (Nasdaq: QQQQ - News) hasn’t even come within 2,000 points of its all-time high. When the S&P and Dow reached all-time highs in 2007, the Nasdaq still traded 44% below its lofty 2000 high. The same is true for the Technology Select Sector SPDRs (NYSEArca: XLK - News).

Investors, who live in the past, cannot expect to reach their future goals. Yesterday’s losers hardly ever turn into tomorrow’s winners. It’s best to exit pockets of weakness before they turn into a bloodbath.

It’s almost been a year since the ETF Profit Strategy Newsletter strongly advised to shun financials and buy financial short ETFs such as the Short Financial ProShares (NYSEArca: SEF - News), and UltraShort Financial ProShares (NYSEArca: SKF - News). In a Trend Change Alert, e-mailed to subscribers on March 2nd, the newsletter recommended to close out short positions and buy long ETFs.

Such a pro-active approach has yielded double digit gains, while holding any of the major U.S. benchmark indexes for even just the past eight months has resulted in a loss of 20% or more.

Buy-and-hold - pros and cons

Breaking away from a long-term relationship can be painful and not without losses. Quality decisions can’t be rushed, so it makes sense to carefully weigh all the pros and cons.

Best case scenario, the stock market will continue to go up (we’ll talk about the market’s prospects in a moment). All boats rise with the tide, including the old buy-and-hold. If a portfolio hasn’t been rebalanced in a while, chances are it will actually underperform in an up-market. Here’s why:

High octane sectors, like the Consumer Discretionary (NYSEArca: XLY - News) and Industrial Select Sector SPDRs (NYSEArca: XLI - News), bounce higher and faster during an economic up-turn. Those sectors are also the ones that got crushed the most during the meltdown.

Due to recent heavy losses in high octane sectors, they are likely to be underweighted.  While conservative sectors, such as the Consumer Staples Select Sector SPDRs (NYSEArca: XLP - News) and Utility Select Sector SPDRs (NYSEArca: XLU - News), managed to gain an overweight advantage. This overweight in conservative sectors will cause a performance drag in an up market. At the very least, a face lift (rebalancing) would be required.

What happens if the market drops to new lows? As we’ve learned over the past 20 months, buy-and- hold portfolios do not fare better than the overall market. Losses are inevitable.

Pro-active approach - pros and cons

Obviously, the pro-active approach allows for direction to be changed more easily, just as a speed boat can adapt to a new course much faster than a super tanker.

A down trend can be neutralized, end even turned into a profit opportunity, by adding short or leveraged short ETFs such as the UltraShort S&P 500 ProShares (NYSEArca: SDS - News), or Short S&P 500 ProShares (NYSEArca: SH - News).

If the market decides to move up, extra returns can be squeezed out with leveraged ETFs, high octane sector ETFs, or dividend ETFs. Some dividend ETFs still come with double digit yields. On March 2nd, the ETF Profit Strategy recommended to buy ETFs such as the Ultra Financial ProShares (NYSEArca: UYG - News), a double leveraged financial ETF, the Vanguard Financial ETF (NYSEArca: VFH), and iShares Dow Jones Select Dividend ETF (NYSEArca: DVY - News).

The biggest danger of a pro-active approach is to get whipsawed - buying ETFs before prices fall and selling before prices rise. To prevent this truly unfortunate scenario, one has to keep an eye on the market.

There are different indicators that can be used to ascertain the market’s direction. Investor sentiment, volume, breadth, CBOE Put/Call ratio, and an array of other indicators can be used as a short-term compass.

P/E ratios, dividend yields, and the Dow measured in real money - gold - provide a reliable, big-picture, long-term outlook. None of the above indicators can solely provide an accurate forecast. However, compositely they can be a truly powerful beacon to navigate your portfolio through rough seas.

The ETF Profit Strategy Newsletter used a combination of short-term indicators to call a January market top above Dow 9,000, and a March bottom below 6,700. The March issue included a detailed analysis of the long-term indicators, along with the target range for an ultimate bottom and subsequent end of this rally.

This rally is giving investors a chance to sell unwanted stocks, ETFs, and funds at prices they would have signed off on just a few months ago. Procrastinators will be forced to make a tough decision at lower prices, while savvy investors will use the rally to their advantage. If you fail to prepare to prepare to fail.

Nouriel Roubini, a professor at New York University’s Stern School of Business and chairman of economic research firm RGE Monitor, said on Tuesday that he expected more dour macroeconomic data and problems in the banking and housing sectors, as well as pressures on consumers.

Nouriel Roubini

Big stimulus packages will eventually slow the rate at which economies contract, but that will take time, he added.

“There will be a light at the end of the tunnel somewhere down the line, later rather than sooner,” he said at a Toronto news conference, which took place ahead of a Sprott Asset Management event entitled “A Night with the Bears.”

Roubini, who made a name for himself by sounding early warning signs about housing bubbles and credit crises, earlier told Canada’s BNN television that he still believed the recent market upturn represented a bear market rally, and not a change in sentiment.

“Macro news, earnings news and financial shocks are going to be worse than expected and that’s why I believe this is still a bear market rally,” he told BNN.

Markets logged four straight weeks of gains until this week on optimism that unprecedented interest rate cuts and billions of dollars of stimulus will eventually fight off the worst global downturn since World War Two, and on upbeat comments from U.S. banks on their performance so far in 2009.

The fact that some indicators did not match pessimistic expectations was also a positive factor, as were last week’s pledges by world leaders to do more to fight the crisis.

But Roubini played down the rally.

“I am more a realist than a pessimist. I’ll be the first one to call for the bottom of this economic contraction, recovery of the market when I see a sustained economic and therefore financial recovery,” he said.

Meredith Whitney, chief executive of Meredith Whitney Advisory Group, said stabilization in the banking sector would hold the key to a turnaround.

Whitney, one of Wall Street’s most bearish bank analysts, has forecast another rough year for banks as they shed assets to raise capital.

• Whitney: Banks’ Earnings May Improve in First Quarter

“It’s not just the banks that have to stabilize their own lending it’s that they have to make up for the void of the shadow banking industry that has been shut down since the summer of 2007. We’ve got a ways to go,” she said.

Canadian banks have largely shrugged off the severe banking troubles south of the border.

But commodity prices have fallen sharply from the peak of last summer and the Canadian auto sector is hurting badly.

“The fundamentals of the (Canadian) economy are robust, but when the U.S. sneezes the rest of the world catches a cold,” said Roubini. “This time around the U.S. is not just sneezing, it’s a severe case of pneumonia and the biggest trading partner next door is Canada.”

Sprott Asset Management’s Eric Sprott said his pessimistic view on the economy is based on the “overleveraging of the banking system.” “When we look at the systemic financial system we’re in — and it affects every country in the world including Canada — I think staying bearish is the route to go,” he told BNN.

March 27 — There may be more bad news on banks even as the U.S. economy improves in the second half of 2009, Goldman Sachs Group Inc.’s Abby Joseph Cohen said.

“We’re certainly not yet in the clear — whether in the U.S. or around the world,” the 57-year-old strategist said in a Bloomberg Radio interview in New York today. “Whilst we have had a great deal of bad news on banks, we think there is still more to come.”

The U.S. economy is looking “less bad” and may post positive growth by the end of the year as the government’s efforts to stimulate the world’s largest economy feed through, Cohen said. “The situation in Europe is of concern to us and economic activity in many countries is still lackluster.”

The Standard & Poor’s 500 Index has clawed back 23 percent since reaching a 12-year low on March 9 as banks from Citigroup Inc. to JPMorgan Chase & Co. said they made money in the first two months of 2009 and U.S. Treasury Secretary Timothy Geithner unveiled plans to rid financial firms of toxic assets.

Stock prices got “too cheap” about a month ago, according to Cohen. “Recessions are difficult and uncomfortable when you are going through them, but they do end.”

Cohen was replaced in March last year by Goldman Sachs as the bank’s chief forecaster for the U.S. stock market. She is known for her bullish predictions during the 1990s stock-market rally. Her year-end forecast of 1,675 for the S&P 500 at the beginning of 2008 was second only to the prediction of 1,700 from Bear Stearns Cos.’s Jonathan Golub, HSBC Holdings Plc’s Kevin Gardiner and UBS AG’s David Bianco.

S&P 500 Forecast

The S&P 500 has a 12-month fair value of 1,025, Cohen said today. That’s 23 percent above yesterday’s closing price of 832.86 and is based on “fundamental” value of stocks in the benchmark, according to the strategist. Profits in the measure will be near $40 a share on average this year, she added.

Cohen’s forecasts came a day after Nouriel Roubini, the New York University professor who predicted last year’s economic crisis, said U.S. stocks will fall and the government will nationalize more banks as the economy contracts.

In contrast, Templeton Asset Management Ltd.’s Mark Mobius and Traxis Partners LLC’s Barton Biggs said earlier this week that equities are poised to rally as government efforts to revive the economy and banking system begin to work.

]]> http://gtsnyc.com/blog/?feed=rss2&p=44 http://gtsnyc.com/blog/?p=41 http://gtsnyc.com/blog/?p=41#comments Mon, 23 Mar 2009 17:17:21 +0000 admin http://gtsnyc.com/blog/?p=41

March 23 — Michael Aronstein, the strategist who predicted last year’s commodities collapse, is putting 20 percent of the money he manages into raw materials in a bet that prices have bottomed.

Aronstein started buying metals, agriculture and energy futures this month for the $115 million fund he helps manage at Oscar Gruss & Son Inc. in New York. The worst commodity rout in at least five decades forced producers to idle rigs and mines at the same time China and the U.S. spend $1.4 trillion on roads, bridges, schools and hospitals, reviving demand, he said.

“People have gotten way too negative about the global economy,” Aronstein, 55, said in an interview. “The markets did not react in a normal recessionary tract. It was like we went through the outbreak of a war or some enormous natural disaster that just closed down the global capital markets.”

Aronstein, a graduate of Yale University who makes knives and tools as a blacksmith in his spare time, isn’t alone. Merrill Lynch Global Wealth Management says commodities will benefit as the economy improves. Theresa Gusman, who manages $215 billion for Deutsche Bank AG’s DB Advisors unit, is telling clients to buy raw materials from copper to oil because of “dramatic” cuts in supplies.

About 43 percent of U.S. rigs exploring for natural gas have been shut since September, the fastest pace since 2002, according to Baker Hughes Inc. Copper producers reduced output by more than 870,000 metric tons this year, or 6 percent, estimates CPM Group, a commodity research firm in New York. Global spending on exploration and production at mining companies has been slashed 50 percent, Gusman said.

‘Optimal Time’

“Now is the optimal time to invest in commodities,” Gusman said. “Supplies have been cut back dramatically and it will lead to a fast depletion of resources. There’s been a significant pullback in exploration. There may be shortages.”

Officials from the Organization of Petroleum Exporting Countries and the International Monetary Fund said at a conference on March 17 that lower oil prices are curbing investment in new fields, risking a supply crunch when the economy recovers. OPEC members idled 4.2 million barrels of daily production, or 14 percent, since September after crude prices collapsed to $52.07 a barrel on March 20 from the record of $147.27 on July 11.

Stockpiles of commodities from copper to coffee have fallen, helping to boost prices the past three weeks. Copper has jumped 17 percent this month, as inventories monitored by the London Metal Exchange dropped 7.1 percent to 503,950 metric tons. Coffee is up 9.7 percent since March 10 to $1.162 a pound on ICE Futures U.S. in New York.

Signs of Rebound

The Reuters/Jefferies CRB Index of 19 commodities rose 6.9 percent since the end of February to 226.08 on March 20, heading for the first monthly gain since June after plunging as much as 58 percent from a record 473.97 on July 3. Among the top gainers in March were copper, crude oil, gasoline and corn.

“Just like high prices are the best fertilizer for a new crop, low prices are the best extinguisher for the old crop,” said Dennis Gartman, an economist and the editor of the Gartman Letter in Suffolk, Virginia, who also correctly forecast the peak in commodities last year. “If you look at most commodities now, you’ll see that they’ve already bottomed. The commodity markets are telling you that there is a strengthening environment in the economy.”

Defying Recession

Prices are increasing even as the U.S., Japan and Europe suffer through the first simultaneous recessions since World War II. During the 16-month U.S. slump from July 1981 to November 1982, the last major recession, the CRB index dropped 11 percent.

“The stimulus plans and other government plans that are happening are coming from a point of weakness, not from a position of strength,” said Gijsbert Groenewegen, a partner at Gold Arrow Capital Management in New York. “You’re not going to see gains for things like copper or oil or the other industrial commodities. They should fall further.”

Aronstein, who started following commodities in 1979 as a strategist at Merrill Lynch, started his first hedge fund in 1987, investing mostly in equities. In 1992, he founded a commodity- focused fund, forecasting that global growth would spur demand for natural resources. The CRB index gained for three straight years starting in 1993. In 1995, he was named one of the 10 best investors of the decade in the Financial Times’ “Guide to Global Investing.”

Commodities or Tech

In 1997, he started a private-equity firm that acquired natural-resource producers, including a timber mill and lumber company, Preservation Wood. He’d make the 400-mile (643-kilometer) commute from his home in Westchester County, New York, to New Portland, Maine, to oversee mill operations and sometimes worked the saw himself to ensure orders got filled.

“Back then, you couldn’t get anyone interested in commodities” because it was the height of the technology-stock boom, said Aronstein, who graduated from Yale in New Haven, Connecticut, in 1974 with a Bachelor’s of Arts degree in English. “All the assets I had looked at in 2000 were selling at six or seven times the price in 2007,” he said. “I just couldn’t get anyone interested. They all wanted to know, ‘Does this have an Internet play?’”

Aronstein, who is married and has two sons, folded his private-equity firm, Commercial Materials, in 2001, just before the start of the six-year bull market in commodities that caused lumber to double and led to a six-fold gain in copper and crude oil.

Commodity Boom

The CRB index more than doubled from 2002 through the first half of 2008, as surging demand and speculative investment in commodities sent the prices of oil, corn, wheat, rice, copper and platinum to records.

The rally began to fade in July on concern the global recession would curb demand. The CRB plunged a record 50 percent in the last six months of 2008 and another 1.5 percent this year.

“One of the things that is unique now is that we’ve just seen a whole bear-market cycle in commodities within a six- or eight-month span,” Aronstein said. “A lot of what happened in commodities had to do with the flow of speculative money. Now, you’re going to see things trading more in line with the fundamentals of each commodity.”

The 29 percent jump in copper this year is an early indication that demand has begun to rebound in China, the world’s biggest metals user, according to Frank Holmes, chief executive officer of U.S. Global Investors Inc. in San Antonio. China’s copper imports surged to a record 283,461 metric tons in February, the Beijing-based customs office said on March 16.

Early Indicator

The metal’s gains have predicted rallies for commodities in the past, said Holmes, who helps manage $2.1 billion. In the first quarter of 2002, copper jumped 17 percent, leading gains in the CRB index. The gauge jumped 23 percent that year, the biggest annual increase since 1979.

Copper will continue to climb in 2009 as last year’s drop forced mining companies to cut production, leaving “tight” supplies of the metal, Holmes said.

Low prices forced Phoenix-based Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, to fire 1,550 employees since December, or 5 percent of its global workforce. The company has announced mine closures that will curb output by 11 percent next year.

Freeport reported a fourth-quarter net loss of $13.9 billion after writing down the value of mines, metal inventories and goodwill related to the acquisition of Phelps Dodge in 2008. Freeport tumbled 76 percent in New York trading last year. The shares rallied 60 percent this year to $39 as copper rose.

Dr. Copper

“They call it Dr. Copper, because it’s used as an economic bellwether,” said Paul Baiocchi, who helps manage $1 billion as a senior market strategist at Delta Global Advisors Inc. in Huntington Beach, California. “We should see soon enough a tremendous pickup in the amount of imports of raw materials in China.”

China’s 4 trillion-yuan ($585 billion) stimulus spending will help boost commodity demand by 15 percent a year for the next five years, Holmes forecasts. Merrill Lynch expects the Chinese economy to grow by 8 percent this year, accelerating to 9 percent in 2010, because of government spending.

“What you are going to see is a rapid rebuild in demand, particularly in places like China,” said Gary Dugan, the London- based chief investment officer for Europe, the Middle East and Africa at Merrill Lynch Global Wealth Management. Commodities are “the only asset class where there is going to be less supply in the future than in the past,” he said.

Renewed Interest

Doe Run Resources Corp., the world’s second-largest lead refiner, said the slump is ending.

“We’re seeing better demand now, compared to the past few months,” said Jose Hansen, a vice president of sales and marketing for St. Louis-based Doe Run. “We’re still below the levels we saw at this time in 2008. But I expect that demand is going to continue to increase.”

Investors also are returning. Net inflows into commodities totaled more than $2.6 billion this year, according to EPFR Global, which conducts research on money flows from Cambridge, Massachusetts.

Matching expectations to reality was what led Aronstein to say in June of last year that commodities were “near some kind of reckoning,” because speculators had driven prices away from supply and demand fundamentals. Now, prices don’t reflect the potential for demand to rebound, he said.

“People are just scared to death right now, so they’re not looking at the bigger picture,” said Aronstein, who also is president of Marketfield Asset Management. “All these emerging markets, like China and India, they still have a lot of money. I can’t imagine that these countries are going to let the power go out or let people go hungry. The basic level of consumption is going to continue and the supply capacity has plunged. These prices will have to come up.”

Making money off the stock market in the past year has been easier than most people think. All you had to do was place an educated bet against Wall Street’s performance, then put your money into an inverse exchange-traded fund—also known as a “bear” fund—and watch the returns roll in.

OK, so it sounds easier than it really is.

Inverse ETFs are somewhat complicated instruments that pay off when the market falls. Sometimes it’s on the entire market, other times on various sectors or indexes within the market—making the past year’s selloff a good time to be betting against stocks.

The gains have been nothing short of eye-popping, especially when many investors have seen their portfolios cut in half by the market carnage. Some bear funds soared nearly 80 percent last year, while others are up

39 percent this year alone.

The big question for investors is whether the party can continue, and how they can get in on the action. While ETFs trade similar to stocks, there’s a lot more to learn about the funds.

“It’s not too late,” says Matthew Tuttle, president of Tuttle Wealth Management in Stamford, Conn. “Once we figure out where the trading range is, the inverse ETFs can be used to scale into them once we get to the upper end of the range.”

Calculating the trading range is critical for those betting against the market.

Many portfolio managers, Tuttle included, are staying away from inverse ETFs for the time being as they await a much-expected and much-delayed bear market rally. Stocks have fallen 25 percent in 2009 alone, causing many market experts to think that a sharp move higher is likely, even if it is only temporary until a true bottom is formed.

Some pros were even saying Tuesday’s big upswing was the beginning of a bear market rally.

“We’ve gone down so much so far this year. We really haven’t had any sort of bear market rally,” says Dave Rovelli, managing director of US equity trading at Canaccord Adams in New York. “We’ve been straight down since the new year. I think we had one or two up days. You could see a significant rally.”

But those who caught the inverse ETF train when the market began its plunge have had a tremendous ride. Some funds have gained as much as 40 percent this year alone, while even many of the weaker sisters among the group have seen returns in excess of 10 percent.

A few to consider:

• ProShares UltraShort Financials [SKF 175.09 -6.33 (-3.49%) ] , up 39 percent in 2009 after gaining just 3.6 percent in 2008.
• ProShares UltraShort MSCI EAFE (economy-based) [EFU  135.40 -0.97 (-0.71%) ] , up 27.4 percent in 2009 and 51.9 percent in 2008.
• ProShares UltraShort Industrials [SU 23.70 0.05 (+0.21%) ] , up 22.6 percent in 2009, and 77.7 percent in 2008.
• Rydex Inverse 2X S&P 500 [RSW 158.96 -3.04 (-1.88%) ] , up 15.4 percent this year, and 69.3 percent in 2008.

The 2X, or double-inverse funds, are relatively new to the market and present an interesting challenge to investors.

While they pay double on the opposite moves of the indexes they track, holders of the funds can get stung on a rapid swing in the other direction.

That’s why some advisers are holding them at arms-length at least for the time being.

“We don’t use them, just because they haven’t been around long enough to really be able to model over a 10-, 15- or 20-day period,” Tuttle says. “Those are much more suited to making day trades.”

If the bear rally does come, those holding 2X or 2.5X funds could get hammered.

Current DateTime: 05:34:23 11 Mar 2009
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“They are derivatives, and if you start looking at them you want to be a trader on those things,” says Bradford Pine, an adviser at Cantella & Co. in New York. “As the longer term trend happens it starts eating away.”

Indeed, one of the biggest problems with using ETFs is educating investors, many of whom don’t understand how the funds work, particularly the risks involved.

As Pine says, the funds are derivatives and therefore contain a basket of ingredients with which investors must familiarize themselves. An ETF that says it tracks basic materials, for instance, could contain chemical stocks as well as metals and more traditional components. Similarly, some financial ETFs are weighted heavily toward particular institutions.

Also, because the funds are new some of them trade on very low volume and can thus be highly volatile.

“They’re much more complicated than people understand. You have to be an educated investor,” says Chapin Hill Advisors’ Kathy Boyle, who often leads seminars on ETFs for other investment professionals, many of whom “don’t quite know how to wrap their arms around this.”

Attaching the word “short” to the ETFs also adds to the confusion.

Buying a “short” ETF is a process similar to buying a stock, with the fund tracking an index such as the S&P 500 or one of its sectors and paying proportionately for moves lower in the index. It is a different animal than short-selling a stock, which occurs when one investor borrows shares, sells them to someone else, then buys them back, hopefully at a lower price that generates a profit from the original selling price.

Interestingly, as the growth of short ETFs has blossomed, many market pros say short-sellers are not to blame for the market’s leg down in 2009. A year ago, many in the market blamed short-sellers for the demise of Bear Stearns and the market contagion that followed.

“I really would attribute the big decline to A) the ongoing loss of confidence, B) the buyers’ strike, and C) it’s not the earnings that keep coming in, it’s the future solvency of any company,” says Andrew Wilkinson, senior strategist at Interactive Brokers. “You can’t blame the short sellers this time around.”

The absence of a short selling burst is a trend likely to continue, even as many see another leg down for the market coming after the bear market rally, which some think will occur if the government suspends mark-to-market accounting or reinstitutes the uptick rule.

Boyle thinks the Standard & Poor’s 500 could eventually fall to 545 before summertime, while Merrill Lynch analyst David Rosenberg sees 600 as making the floor later in the year. Todd Salamone, director of trading at Schaeffer’s Investment Research, said 600 may not even be steep enough as the lack of despair continues to prevent a true bottom.

In such a climate, the short ETFs are likely to prosper.

“I would be doing the opposite of what people are doing,” Tuttle says. “That’s where you’re going to make money on these inverses.

“I would not be doing it now, because I do agree we are going to see a bear market bounce and I don’t want to get caught short. We could be in line for one of those up 10 percent days.”

“There really is a large sum of money left upon the sidelines and there are huge short positions that must be unwound,” wrote Dennis, in the widely followed Gartman Letter. Following a move to this targeted range, “the shorts will have been driven in; new longs will have become exited and will have put their money at work, and the stage will be set for another round of weakness.

As mentioned in yesterday’s post, a rally of that magnitude would still not match the ‘bull market’ (What? You didn’t notice?) that took place from November to January where the S&P 500 gained 24 percent.

So for short-term players, what are the best ways to trade this bounce? Jeff DeGraaf, head of technical analysis research at ISI and the No. 1 such analyst on the street, is a buyer of Sprint [S 3.55 0.01 (+0.28%) ] and Morgan Stanley [MS 22.60 1.76 (+8.45%) ] . Morgan Stanley got an upgrade this morning from Goldman Sachs [GS 90.67 5.39 (+6.32%) ] .

Joe Terranova, FM Trader and chief alternatives strategist at Virtus Investment Partners, is buying oil names such as ExxonMobil [XOM 66.92 -0.47 (-0.7%) ] and ConocoPhillips [COP  38.62 0.62 (+1.63%) ] , which have led past rallies in this bear market.

We’ll be on the ‘bear bounce’ case again tonight. Many of the traders may not believe this is the beginning of the end of the credit crisis, but that ideology is not going to stop them from riding the momentum in some of these names to help their book this year.

Louise Yamada - Sheeeee’s Back

We wrote about Louise Yamada back in November 2008 at a similar frightful moment in the market. [Nov 21, 2008: Fear Louise Yamada] Well… she’s back.

Louise Yamada formed an independent research company in 2005 - Louise Yamada Technical Research Advisors, LLC (”LYA”) - to provide the same in-depth and thought-provoking research that clients had come to expect during her 25 years at Smith Barney (Citigroup) as a top-ranked “Institutional Investor” technical analyst.

As Managing Director and Head of Technical Research for Smith Barney, Louise Yamada was a perennial leader in the Institutional Investor poll, and was the top-ranked market technician in 2001, 2002, 2003 and 2004.

Back then we wrote

Louise Yamada has been one of the technicians to nail this downturn (certainly, best technician on the planet pound for pound); she appeared on Fast Money last evening and if we continue to follow her calls, we have nothing to fear but… everything. Actually her S&P 600 target does coincide with a lot of potential things I can see; what is troubling is the call for a potential move to S&P 400.

With fundamentals meaning absolutely nothing and the rise of the machines on Wall Street, I think technical analysis has really taken the reigns - and it is something that becomes a self fulfilling prophecy. When people ask me about technical analysis I give an example - if you saw a trend that every time it was 90 degrees in Miami sweater sales jumped 40%, and you were a sweater salesman what would you do? Scoff? Or respect the trend while scratching your head, and get out there selling sweaters. Essentially technical analysis is the latter in my eyes - and the more people who follow it, the more itself fulfills.

Let’s see what her latest appearance on CNBC’s Fast Money brings us (only need to watch the first 4.5 minutes) She is consistent with her target but more troubling is the similarity to the Great Depression stock market - not just in the initial fall but how it is lining up in terms of the years after…. history doesn’t necessarily repeat but perhaps rhymes. Seems impossible such a horror could repeat right? Just remember all the things you said were impossible a year or two years ago. But hey at least in the 2000s we have shorting and inverse ETFs to allow us some profits or at least hedging. Well perhaps not in 99% of mutual funds… but in some future products (hint hint)

*****************

….what does she see going forward?

Unfortunately patterns in the S&P don’t translate into good news. Yamada sees a clear 10 year double-top and suggests we probably have further to fall.

“Now that the 2002 lows have given way we have further to go, she says. “The first targets are 6,000 in the Dow and 600 in the S&P and the second target, I hate to say it, could be 4,000 and 400.”

To support here thesis she points to trends that happened immediately following the Crash of 1929. Wealth destruction didn’t actually occur at the crash. It happened after a bounce in 1930 and lasted well into 1933.

If you’re looking for a survival strategy Yamada says it’s important to be holding cash. “And if you get into this market make sure it’s with a trailing stop.”

Of course here thesis doesn’t take into account that the Hoover administration wasn’t nearly as aggressive as the Obama administration. Also Fed Chairman Ben Bernanke is a scholar of the Great Depression.

What’s the bottom line? Let’s hope this time history doesn’t repeat itself.

Market pros in increasing numbers are eschewing the usual investing strategies and watching technical levels as their guides for making money. They examine temporary market tops and bottoms as guidelines when to sell and buy, and are in many cases utilizing funds rather than individual stocks to make their plays.

Earnings and economic data have proven unreliable to gauge the long-term prospects for the market, which has become a trader’s battlefield. Money that once stayed put for three to five years can now get moved in three to five days or sooner.

“What’s happening is people have learned that if you don’t take a profit it goes away,” says Kathy Boyle, president of Chapin Hill Advisors in New York. “Even somebody who’s really biased towards buy-and-hold is giving up.”

The phenomenon has been on display markedly since earnings season kicked into gear this month.

More than half the companies in the Standard & Poor’s 500 have beaten earnings expectations, yet the stock index has dropped nearly 7 percent.

The economic data, meanwhile, have been close to expectations. Friday’s report on fourth-quarter GDP was actually better than what Wall Street predicted—though at a 3.7 percent drop, the numbers were hardly encouraging.

But investors seem to be ignoring the data.

Instead, they’ve turned towards more of a trader’s mentality, pushing the Dow back up when it approaches 8,000 and the S&P when it falls near 800. It’s a trend that bucks the traditional long-term horizon most investors are supposed to take, but for many it’s working.

“The idea of saying valuations are historically low so we’re just going to buy and hold, that comes at great peril over the next year or two,” says Lee Schultheis, founder and chief investment strategist at AIP Funds in Harrison, N.Y. “But also being overly bearish might also come at peril if the government’s able to get ahead of the curve on the liquidity-credit issue. Once that gets solved equities will have the opportunity to advance.”

Indeed, Boyle has moved nimbly in and out of positions in exchange-traded funds–these days mostly those with a bullish look on the market. She expects a run higher for the market to last into mid-February, when stocks will move lower and Boyle will quit or reverse her positions.

Dealing with the market’s intense moodiness is all part of the job these days.

“People get hopeful and say, ‘oh good,’ and pile in, or  they get depressed and they hit the support level,” Boyle says. “It certainly makes for an interesting day every day.”

A Better Mood—For Now

Even as the market was surrendering the gains it saw earlier in the week, there was plenty of enthusiasm for the market to go higher.

Ben Lichtenstein, a long-time bear who had been warning through much of 2008 about the pressures facing the market, reiterated on CNBC that he thinks stocks are in for a nice gain, with the S&P 500 flirting with the mid-900s if it breaks through 880.

“Everybody expected the worst to happen and it’s slowly starting to fade out a little bit,” he said. “I think the energy’s only to the upside right now.” See full comments in video.

Lichtenstein, of Tradersaudio.com, could be expected to follow technical levels.

But those with a traditional investors’ horizon of 18 months and beyond are following suit, moving through positions in a way that would be discouraged in a normal market.

Some advisors are disturbed at the trend.

“If the time frame is 18 months to two years I’m very bullish. If the time frame is this afternoon your guess is as good as mine, but unfortunately that seems to be what people are looking at,” says Randy Carver, president of Carver Financial Services/Raymond James in Mentor, Ohio. “I think the public is just kind of beat down, at the point of capitulation. People are just resigned to the fact that it’s bad.”

Some Companies Take a Hit

One case in point for the strange logic in trading is Caterpillar.

The Dow component and construction manufacturing behemoth would seem well poised for a good year considering President Obama’s stress on infrastructure programs in his stimulus plan that the House recently passed.

Yet Caterpillar [CAT  30.85 -1.00 (-3.14%) ] shares have been under intense pressure, dropping about 9 percent this week, as it announced 22,000 layoffs. Under other circumstances, such a stock might be considered a solid long-term hold, but with all the uncertainty in the economy it’s being sold off aggressively.

“Everybody’s afraid to trust the fundamentals. Everybody’s afraid of what these numbers are going to mean,” Boyle says. “You have this continued slew of layoffs as the earnings come out. Everybody’s getting used to lowered expectations but at the same time they’re throwing in ‘we’re laying off another 20,000 people..’ That hurts the economy.”

For protection against the whipsaw turns in the market while capitalizing on a long-term bullish philosophy, Carver is playing a battery of ETFs that follow individual sector movements as well as gains in the broad market.

He likes several of those in the iShares family: the S&P 500 Index [IVV  82.92  ---  UNCH (0) ] , the Russell Midcap Index [IWR  55.49 -1.57 (-2.75%) ] and the S&P SmallCap 600 Index [IJR  38.83  ---  UNCH (0) ] , and outside that group, the Vanguard Total Stock Market [VTI  41.14 -0.90 (-2.14%) ] , which essentially is a play on everything, even Over The Counter companies not listed on the major exchanges.

Such enthusiasm isn’t universal, with a level of caution also prevalent that accompanies technical trading.

With all of the obstacles facing the market, regaining investor confidence will be critical before buy-and-hold positions become popular again.

“You need that confidence, that psychology to be restored,” Schultheis says. “We need to know government’s ahead of the curve, that they’re not playing whack-a-mole, that we can now act and spend in a more normal fashion because we have a more reasonable expectation of what we see coming down the road. Then and only then will there be an opportunity for a sustained advance in equities.”

“We think the Dow’s going to hit probably about 7,000 and that means it’s going to go below its lows that it hit last year – that’ll be the capitulation, that’ll be when we get some indication of things having cleared out,” Patel said.

The sharp falls could happen in either February or March he added. When stocks get to those levels investors will be lured back in by the attractive valuations, he predicted.

Investors looking for a clear signal that stock selling has been exhausted should watch the stock price of Microsoft, Patel said.

“Wait for Microsoft to move from its current $17 (per share) to around $21/$22.  That will give you some indication that the market is starting to recuperate again,” he said.

Companies like Microsoft [MSFT  17.98 0.88 (+5.15%) ] are a good barometer for the rest of the market because they are cash rich and don’t have the “clouds of survivability” that are hanging over other companies, he said.

Even though Patel thinks capitulation is due to take stocks higher soon, he points to the ‘January Effect,’ which suggests that the overall year will be negative for stocks. The ‘January Effect’ theory says that if the first month of the year is lower, which was the case for the major indexes this year, the markets will fall for the rest of the year.