ETF Expert

The media conjured up a reason for the huge gains on the first day of trading, 1/04/10. Indeed, most outlets pointed to better-than-anticipated U.S. manufacturing growth, while conveniently ignoring the decrease in construction spending.

None of the headlines had it right, anyway. Plainly stated, the “risk trade” returned with a Crameresque, “Buy, Buy, Buy.”

(Hey-La-Day-La… the risk trade’s back.)

How can you tell if it’s the “risk trade,” a.k.a. U.S. dollar carry trade, that’s moving the markets? The U.S. dollar goes down… and everything else goes up!

Look at your portfolio. No… I mean really look at it. Did all 15 investments have green arrows? That may feel good on the day that it happens… but it’s not an indicator of genuine diversification and it’s not likely to weather a financial pandemic.

When every single thing in your portfolio goes up — foreign stocks, U.S. stocks, foreign bonds, U.S. bonds, foreign currencies, commodities — that’s people putting devalued U.S. dollars into the markets. As long as you’re participating in the flow, you’ll profit.

But you better keep an eye on the U.S. dollar. If it gets too strong, savvy investors will exit the “risk trade” and you’ll be stuck holding the remains.

Yeah, the risk trade’s back… and you’re gonna be in trouble without a discipline for dealing with risk.  You might not think that the U.S. dollar can strengthen. Yet there are at least 3 ways that it could happen quickly:

1. Soaring U.S. Economic Growth. Okay, so maybe this is a long shot. We’re not likely to out-hustle the emerging markets. Yet the U.S. can beat the developed market competition in Europe and Japan. Heck, unemployment may even head lower. Think the U.S. dollar won’t respond to exceptional news on jobs and GDP?

Potential ETF solutions: Use stop-losses to exit ETF positions. Watch the PowerShares Dollar Bullish Fund (UUP), and or purchase it, if it climbs above a 200-Day moving average. 

2. Dubai-Like Sovereign Debt Blow-Up.  Greece, Ireland and Dubai are just a few examples of countries that are facing scrutiny over their ability (or lack thereof) to meet debt obligations. If there are others that are ready to blow, folks will head for the perceived safety of the U.S. dollar. The result? The ”risk trade” unwinds.

Possible ETF solutions: Use stop-losses to exit ETF positions. Watch the UltraShort Euro ProShares (EUO), and or purchase it, if it climbs above a 200-Day moving average. Also, if the risk-trade shows signs of wear-n-tear, you’ll steer clear of exotic currencies like the CurrencyShares Russian Ruble (XRU).

3. Housing Bubbles Abroad. In the U.S., the access to credit was too easy for every man, woman and person with a pen. In response to the credit crisis, worldwide governments infused the world with still more liquidity. And now, if it doesn’t pull off the accelerator, there is an increasing likelihood of ”get-rich” behavior. The money is already flowing into places like commodities and stocks… and it may already be creating housing bubbles in other parts of the world.

Possible ETF solutions: Use stop-losses to exit ETF positions. Avoid or sell SPDR DJ International Real Estate (RWX). It has been trading sideways with a slight near-term downtrend for 4 months.

If you’d like to learn more about ETF investing… then tune into “In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod. If you’d like to subscribe to ETF Risk Alert, click here.

Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.