The Markets or The Mattress: Where Should You Put Your Money? (SPY, DIA, SPXU, RWM, SDS, IWM, VGK)

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January 24, 2012 11:44am NYSE:DIA NYSE:IWM

Keith Fitz-Gerald: The next 1,000 points on the Dow Jones Industrial Average (NYSEArca:DIA) in either direction are going to be determined by what happens in  two cities thousands of miles from our own shores… Athens and Berlin.

What’s more, the risks associated with Europe’s (NYSEArca:VGK) redemption,  or its failure, are more concentrated now than they were before the crisis  began.

There are two reasons: a) Europe won’t help itself and b) Wall  Street may still have $1  trillion or more in exposure to European problems.

What makes me crazy right now is that European chatter is what’s driving the markets.

Every sound bite from Europe is critical these days. Not  because there is anything relevant in the political babbling from financial ministers tasked with fixing this mess, but rather that there is a cascade of events that could take us in either direction.

Fix this mess and the markets will take off for a 1,000 point gain that will leave anybody who is on the sidelines hopelessly behind.

Fail and the markets could tank.

It certainly fits the pattern established in recent months. News leaks suggesting solutions  have brought on rallies, while negative leaks have caused a ripple effect that  has quickly dumped stocks into the hopper.

Yet, it’s not really the numbers that matter at the moment –  even with the Fed rumored to be considering another $1 trillion stimulus and reports that the European Central Bank (ECB) and International Monetary Fund (IMF) may be seeking as much as $600 billion each.

No. The market swings we are seeing are all about confidence  or, more specifically, the near complete lack thereof.

The Mattress vs. The Markets

A recent report from TrimTabs shows that checking and  savings accounts attracted eight-times the money that stock, bond and mutual  funds did from January to November 2011.

That is a whopping $889 billion that went under “the  mattresses” versus only $109 billion that went into the markets.

In fact, CNBC is reporting that the pace of  money headed for plain-Jane savings and checking accounts from September to  November accelerated to nearly 13-times the average monthly flow rate of the  preceding nine months from September to November.

What’s significant about this is that the money has headed  for the sidelines when the markets have rallied.  Usually it’s the other way around. Normally money floods into the markets when  they move higher.

The other notable thing here is that, generally speaking, up  days this year have had thinner volume than down days. This means that most  investors just can’t handle the swings. In other words, every time the markets  dip, they’re packing it in.

Pessimism is the Breeding Ground of Opportunity

Bottom line: Investors are making a gigantic mistake –  especially those with a longer-term perspective.

Periods of maximum pessimism – when everybody “knows”  something – usually make for a variety of great buying opportunities.

For instance, do you remember the following quote?

“The economy is  staggering under many “structural’ burdens, as opposed to familiar problems.

The structural faults  […] will take years to work out. Among them the job drought; the debt hangover; the banking collapse; the real estate depression; the healthcare cost  explosion and the runaway federal deficit.”

I remember it like it was yesterday.

It’s from TIME magazine in September 1992 – right before the markets took off  on a breathtaking 16-year run.

To be clear here, I am not suggesting that the markets are  about to go on a triple percentage point bender, only that investors would be foolish to ignore the possibility.

In fact, the very notion that Wall Street remains in denial about Europe and Europe itself still refuses to confront the seriousness of its situation bodes well for almost anybody willing to go against the grain.

That’s been the case throughout history.

Take the Panic of 1873.  It was the world’s first truly international financial crisis and, by  many measures, actually far worse than what we’re dealing with now.

Things were so bad that more than 18,000 businesses closed,  sending unemployment soaring to 14%. The  NYSE even closed for ten days.

The depression that started in 1873 lasted until 1879 here  in the United States and another 20 years in Britain — where it’s known as the  “Long Depression” in history books.

Yet through it all, the market’s dips, twists and turns  turned out to be extraordinary buying opportunities. (You can learn more about  a similar opportunity that I recently discovered in today’s markets by clicking  here.)

The same thing ultimately will be true today, especially if  you’re building long-term investment positions in “glocal” stocks with experienced  management and fortress-like balance sheets that produce high dividends.

I feel the same way about energy, commodities and very specific microcap companies with promising inventions, medical technology or  some other catalyst that can create game-changing returns.

It takes a lot of nerve, but that’s how the markets work.

Related: SPDR S&P 500 ETF (NYSEArca:SPY), ProShares UltraShort S&P 500 ETF (NYSEArca:SDS),  ProShares UltraPro Short S&P 500 ETF (NYSEArca:SPXU), ProShares Short Russell 2000 ETF (NYSEArca:RWM), iShares Russell 2000 Index Fund (NYSEArca:IWM).

Written By Keith Fitz-Gerald From Money Morning

Keith Fitz-Gerald is the Chief Investment Strategist for Money Map Press, as well as Money Morning with over 500,000 daily readers in 30 countries. He is one of the  world’s leading experts on global investing, particularly when it comes  to Asia’s emergence as a global powerhouse. Fitz-Gerald’s specialized  investment research services, The Money Map Report and the New China Trader,  lead the way in financial analysis and investing recommendations for  the new economy. Fitz-Gerald is a former professional trade advisor and  licensed CTA who advised institutions and qualified individuals on  global futures trading and hedging. He is a Fellow of the Kenos Circle, a  think tank based in Vienna, Austria, dedicated to the identification of  economic and financial trends using the science of complexity. He’s  also a regular guest on Fox Business. Fitz-Gerald  splits his time between the United States and Japan with his wife and  two children and regularly travels the world in search of investment  opportunities others don’t yet see or understand.

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