While recent news on the US economy, especially the non-farms payroll data, as been positive (OK, more like less negative than expected), in the past weeks, a number of powerful long term market trends have continued in currency and commodities markets and should continue over the coming months, albeit with the usual short term counter moves. In sum, these include:
- The weakening dollar against all major currencies.
- The ensuing up trend in commodity prices (commodities are priced in USD) and their related currencies, the CAD and AUD against other major currencies.
However, we remain skeptical that the multi-month rally in equity markets will endure. Thus we do not recommend new long positions in them, and await shorting opportunities.
Here are the details:
What’s Killing the Dollar?
The biggest single story is the deterioration of the long term fundamentals of the USD. Why? In short, President Obama has no choice but to continue to expand the money supply at rates that will badly damage its value……..
Ramifications for High Dividend Stock Investors
In sum, we appear to be at the upper end of a trading range, with the overall trend continuing down. Continue to invest only with funds allocated for longer term investment that you don’t need for the next six to eighteen months at least. What you buy now may well go lower.
Consider a Partial Hedge with Selected Ultrashort ETFs
Thus, in addition to collecting your high yields, those seeking a more active hedge may wish to consider taking measured positions some of the Ultrashort Proshares ETFs as a partial hedge. For the unfamiliar, these are ETFs that move at twice the inverse of a selected sector of stocks. Thus for example if the S&P 500 index falls 1%, then SDS, its Ultrashort ETF, will rise by 2% (and vice versa).
The time is ripe to consider some of these. While by nature these are volatile, you want to buy these only as a partial hedge at strong support when the market has just stopped feeling very optimistic, as a rally begins to show signs of fading.
This looks like the time. Consider taking partial positions in the following.
- UltraShort S & P 500 Proshares (SDS) – Buy under $60, Strong Buy under $55
- UltraShort Financials ProShares (SKF) — Buy Under $50; Strong Buy below $40
- UltraShort QQQ ProShares (QID) – Buy Under $40, Strong Buy under $35
- UltraShort Real Estate ProShares (SRS) – Buy Under $30, Strong Buy under $20
- UltraShort Russell2000 ProShares (TWM) – Buy Under $50, Strong Buy under $40
If you look at a chart for these, you’ll note my buys are very conservatively low. There is a lot of cash on the sidelines now, earning virtually nothing. Big players and insiders continue buying stocks we’ve been mentioning, because they’re clearly cheap and excellent long term values. As the past few months have shown, any glimmer of positive news brings buyers as everyone is waiting for the sign to jump in. Lots of cash on the sidelines will provide lots of fuel in the tanks for a rally.
If that happens, these ultrashorts can plummet fast, so you only want to buy them at strong support, so that if these levels don’t hold up you’ll know quickly and can get out before taking a big loss. Thus place sell stops no more than 10% below the Strong Buy levels to protect your capital. There are other Ultrashorts for other sectors, like the Ultrashort Oil and Gas (DUG) for shorting oil and gas. This one has been popular, but betting against energy and other commodities is dangerous and strictly for short term traders with expertise in these, so avoid this one.
Continue to Take Partial Positions at Our Recommended Strong Support Levels
Beyond the Ultrashort ETFs if you can earn reliable dividends from 8-12 percent or more while you wait for recovery, ongoing investment makes sense. You just need to find the best bargain priced quality high yield stocks, and collect your income while waiting for the market to improve and offer additional options. As noted above, with a confirmed downtrend and good evidence for a further 20% overall drop, refer to our past recommended buy levels, which are at strong support levels.
Since prices are up and thus yields are down, many of our stocks are above recommended buy points. Do not chase them, though taking partial positions above these prices is acceptable for those with lots of cash lying fallow. This is particularly so with the energy producers.