Wednesday, September 16, 2009

ALERT 09/16/09: Strategies for an Overextended Market

Doug Fabian's
Making Money Alert | Wednesday, September 16, 2009
In This Issue:

» NEW! Video Alert
» Strategies for an Overextended Market
» The Cost of Health-Care Reform
» ETF Talk: Feeling a Global Sugar High
» Seven Secrets of Success for ETF Investors
» The Obama Impact on Your Money, Part II
» The Wisdom of the Wealth of Nations
By: Doug Fabian | Editor, Successful Investing | President, Fabian Wealth Strategies
Strategies for an Overextended Market

This market is just downright crazy. It seems like no matter what happens in the economy, with earnings, on the political front or on the world stage, stocks still act like the Energizer Bunny -- they keep going, and going, and going and going.

To give you a sense of just how far stocks are extended in relation to their long-term, 200-day moving averages, let's take a quick look at the following charts.

First, we have the S&P 500 Index, which is now 19.5% above its 200-day moving average.

Next, we have the tech-heavy NASDAQ 100 Index, which is 26% above its 200-day moving average.

But this overextended market isn't content to stay within U.S. borders. Take a look at the chart below of the iShares FTSE/Xinhua China 25 (FXI), an ETF representing the biggest Chinese stocks. Here we see FXI is 31% above its 200-day moving average.

Of course, it's not just the red-hot emerging market dragon that's seen big gains. The EAFE Index (EFA), which represents the equity markets in Europe, Australasia and the Far East, also is overextended. The EAFE now is 27% above its 200-day moving average.

So, how do you manage your portfolio in this overextended market? Well, if you have gains, make sure you keep them. That means you have to make sure you have stop losses in place on all of your positions. The last thing you want to do is give back a significant percentage of the ground you've made up over the past several blazing-hot months in the market.

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If you are looking to put new money to work, then you can do so, but make sure you proceed with extreme caution. The worst thing you can do is buy at the top and watch your money float down the drain. If you are going to invest here, make sure you define your risk by putting tight stop-loss orders on any new positions. Also, make sure you don't throw all of your money into stocks at once.

If you are going to put some new money to work, make sure you do so incrementally. If this rally continues, you can keep putting your chips in the pot in a judicious manner.

The Cost of Health-CareReform

The latest news on the health-care reform front came today, as Sen. Max Baucus unveiled his highly anticipated Senate Finance Committee version of an American health-system makeover. The Baucus plan will cost taxpayers an estimated $856 billion during the next 10 years, and would make big changes to the nation's health-care system, including requiring all individuals to purchase health-care or pay a fine, and prohibiting insurance company practices like charging more to people with more serious health problems.

According to the Baucus proposal, consumers would be able to shop for and compare insurance plans in a new purchasing "exchange." Medicaid would be expanded, and caps would be placed on patients' yearly health-care costs. Theoretically, the plan would be paid for with $507 billion in cuts to government health programs and $349 billion in new taxes and fees, including a tax on high-end insurance plans and fees on insurance companies and medical device manufacturers.

The one "missing component," if you will, in the Baucus plan is the so-called "public option," which is essentially a new, government-run insurance plan designed to "compete" with the private insurance market.

Now, it's hard to say exactly how this whole health-care reform battle will play out, but one thing I know for sure is that as investors, you better be ready to react to whatever version of the bill gets President Obama's signature.

If you own stocks in the health-care sector, you've likely made some good money. If we look at the chart here of the health-care Select Sector SPDR (XLV), we see a nice run higher since March.

But depending on the specific provisions in the final iteration of this bill, I want you to be prepared to take your health-care sector profits off of the table quickly. There will be time to make a move back into this sector once the dust settles, and once the true winners and losers in the space are revealed.

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Prepare Yourself for a Second Market Crash!

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Hey, it's just another chapter in the government's ongoing effect on stocks, so make sure you read the details -- and be sure you know what to do when action is necessary.

ETF Talk: Feeling a Global Sugar High

For the first time in 28 years, sugar prices have topped 21 cents per pound. That's an 88% increase year-to-date! If that isn't sweet enough, some analysts are projecting that the price of sugar could reach a staggering 40 cents per pound, making this investment even more appetizing.

Many investors have been piling into the commodity in expectation of an even further price increase. If you're thinking about doing the same, you have several options. One investment that I've been watching lately is the iPath Dow Jones AIG Sugar Total Return Sub-Index ETN (SGG). The investment seeks to replicate as close as possible the Dow Jones-AIG Sugar Total Return Sub-Index. The index is intended to reflect the returns that potentially are available through an unleveraged investment in sugar futures contracts, as well as the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.

The graph below shows just how well the exchange-traded note (ETN) has responded to increased sugar prices. In fact, it's up 55.4% this year.

So, what exactly is behind this price hike? The simple answer is that the sugar supply is shrinking as demand is rising. The world's consumers simply are seeking more sugar than farmers are producing. According to the International Sugar Organization, world demand will exceed output by as much as 5 million metric tons for the 12-month period ending September 2010.

The short supply can be blamed on several factors. One of the biggest problems for sugar crops this year has been abnormal weather patterns in the world's largest sugar-producing nations, including Brazil, India and China. The world's largest sugar producer, Brazil, has been drenched by four times the normal amount of rainfall. While in India, the world's second-largest sugar producer, rain has been scarce with the country plagued by severe drought.

China, the third-largest sugar producer, will have smaller harvests this year due to reduced planting. The same trend is seen in Russia and Mexico, forcing the world's biggest sugar exporters to begin importing.

And then there's also the fact that the world is consuming more sugar in general. Sugar consumption usually increases as per-capita income climbs. So, as conditions and incomes rise in developing countries, sugar consumption only should grow.

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A shortage in sugar supply has caused concerns for the management teams at giant food companies such as Kraft Foods (KFT), General Mills (GIS) and Hershey Co (HSY). In a joint letter to Agriculture Secretary Tom Vilsack, the corporate leaders wrote, "we may well virtually run out of sugar."

Their hope is that this petition might convince U.S. government officials to ease import restrictions that have been in place to protect American farmers from global competition. The result of these import quotas has been that U.S. food companies pay higher prices for sugar, as seen in the graph below.

It is unclear whether sugar prices will continue to rise, despite the forecasts of analysts who predict that the prices for that sweet commodity likely will climb higher. However, market booms ultimately go bust. When the price of sugar reaches its peak, those still invested in it are vulnerable to the inevitable downturn. As a result, investors should enter with caution. If you think that prices will continue to climb, SGG could be a very sweet choice.

For those of you who want specific advice about which ETFs to buy and sell, check out my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs. To send me your questions, please click here. You may see your question answered in a future ETF Talk.

Seven Secrets of Success for ETF Investors

I recently returned home from a fantastic trip to San Francisco, where I gave several presentations to attendees of the Money Show. I must say that this year's show was not only well attended, but most of the attendees I spoke with were brimming with enthusiasm and optimism about the opportunities in the market going forward. The upbeat climate was very refreshing, and it was a far cry from the climate at some of the Money Shows I went to in 2008, when it seemed like everyone was scrambling to protect themselves from financial ruin.

One of the seminars I gave during that weekend was titled, "The Seven Secrets of Success for ETF Investors." Here's a quick sample of those seven secrets, taken directly from my Money Show presentation:

1) Transparency: Look Before You Buy

2) Volume Matters

3) Exposure Is Key

4) Gauge the Risk

5) Selecting the Number of Funds

6) Know When to Sell

7) Monitor Your Portfolio

I know these seven secrets require a little more elaboration, and I'm happy to do so. In fact, all you have to do to get my complete PowerPoint presentation is click here.

Finally, I'd like to take this opportunity to thank all of you who came to my presentations in San Francisco. This was one of the best Money Shows I've been to, and it's all because of you. I hope to see you all next year in the city by the Bay.

The Obama Impact on Your Money, Part II

On Tuesday, Sept. 15, we conducted the second installment of our teleconference on "The Obama Impact on Your Money." Judging by the slew of emails I received, the event was a resounding success. I want to thank everyone who joined us on the call. I know many of you have been interested in the material from this presentation, so if you missed it, all you have to do is click here.

Five Action Steps

For those of you unable to join us, I shared five action steps that I believe are important to implement now if you want to improve your financial results:

1. Circle the wagons around your liquid assets. You must prepare yourself for another deflationary collapse in stock prices. In order to do so, you must complete an inventory and assessment of your current invested positions.

2. Review the number of service providers you are working with. Sometimes investors end up with too many investment providers. This makes money management more difficult than it should be.

3. List all of your stocks, bonds and mutual funds. The purpose of this action item is to determine how much exposure you have to risky assets. You want to know the percentage invested in stocks, bonds and cash, because having the right asset allocation is a key to prevailing during volatile times. In addition, you want to know how your stocks and bonds did last year, because you want to have stop losses on risky assets that may go down again.

4. Know your safe harbors. Money markets, Treasury bills and notes are safe investments during deflationary times.

5. Prepare for a U.S. Dollar crisis. Review the information in this latest presentation on ETFs that you can use if the dollar continues its downward spiral.

So what's the next step? Put your knowledge to use!

Knowledge without action is powerless. Now you need to put to work what you've learned to take care of your money, and the first step toward putting that knowledge into action is to make sure you listen to part II of my teleconference series by clicking here.

NOTE: Fabian Wealth Strategies is an SEC registered investment adviser, and is not affiliated with Eagle Publishing.

The Wisdom of the Wealth of Nations

"Give me that which I want, and you shall have this which you want."

--Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations

In this brilliant and ultra-pithy statement, the great Adam Smith gives us the essence of capitalism and free trade. For the country's sake, I hope that at least a few of the people currently employed at the top levels of government have actually read Smith's quintessential work.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else. Click here to Ask Doug.
On the Radio:
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