Only Add New Money On Market Pullbacks

By November 5, 2010Weekly Writeup

The stock market received everything it could have wanted… and more.

The mid-term election gave business-friendly Republicans the House, but not the Senate. President Obama has signaled that he’s willing to extend the Bush tax cuts in their entirety for 1 to 2 years. And the Fed is buying just enough treasury debt to keep treasury yields low, while not spooking the markets with an extreme purchasing program.

These three outcomes worked in concert to produce one of the best weeks for equities all year. Not surprisingly, nearly every major index has hit fresh 2-year highs.

Moreover, all of our indicators remain exceptionally bullish. The CBOE (VIX) Volatility Index is below its 50-day MA and the US$ is below its 50-Day. The S&P 500 SPDR Trust (SPY) and Vanguard Emerging Markets (VWO) are well above short-term as well as long-term moving averages.

With all of this said, one should expect a technical correction of 4%-7%. Rather than add any new money to the markets at significant new highs, wait for profit-takers to push the markets down a “skohsh.” Then buy the dips. 

For the most part, stick with the winners that have worked throughout the year. On pullbacks, I’d remain committed to maintaining “exposure to broad market emerging stock funds like Vanguard Emerging Markets (VWO). Surround your core holding with several low-risk emerging countries like Singapore (EWS), Malaysia (EWM), Peru (EPU) and/or Chile (ECH).”

If you’re intrigued by ancillary positions, consider:

1. PowerShares Financial Preferred (PGF). If you’re not looking to make a killing in capital appreciation, and if you believe that the probability of a second collapse of the financial system is negligible, then PGF may be a worthy addition to your portfolio. Preferred shares do not carry the same risk as common stock, and a diversified basket of A-rated credit debt reduces the risk of individual-issue Armageddon. Equally important, the 7% annual yield that is distributed monthly represents a 500 basis point credit spread over comparable treasury debt. QE2 should keep PGF attractive.

2. PowerShares Global Listed Private Equity (PSP). The business of “buying out” public corporations, lending capital and/or acquiring distressed assets is making a comeback. Unlike most U.S. Financial ETFs that are still well off their April highs, PSP has long since shattered it. On top of a 3% 30-Day SEC annual yield, PSP is in the top 1/5 of all ETFs on relative strength. Its 50-day trendline climbed above its 200-day trendline at the start of October, indicating a strong likelihood of continued bull market success.

PSP 50 200

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