Hedge the Pullback with the Yen

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

That’s too bad, as many of your Global Bull Market Alert positions, including Cognizant Technology Solutions Corp. (CTSH), Millicom International (MICC) and Mechel (MTL), hit yearly highs last week, before pulling back on Friday.

So what are the implications of the Goldman affair for your Global Bull Market Alert portfolio? At times like these, the baby goes out with the bathwater. But over the medium term, look at any substantial pullbacks as opportunities to add to your positions.

Two things, however, worry me about this recent sell-off.

First, the extent of Goldman’s woes remains unclear, as does its implications for the financial sector across the board. Almost all of the S&P 500’s recent earnings growth has come from the recovery in financial sector earnings. It’s also hard not to see the SEC announcement as carefully timed to coincide with the Obama administration’s clamp down on Wall Street. If this is the start of a concerted campaign against Goldman Sachs, as well as Citibank, Bank of America and others, there may be rough seas ahead for the U.S. stock market.

Second, the recent run-up in the markets has been unusually devoid of almost any substantial pullbacks. The Chicago Board Options Exchange’s VIX, also known as the volatility index or “fear gauge,” dropped to its lowest levels since July 2007, before spiking 20% on Friday. Such extreme complacency among investors tends to signal that any ensuing pullback is likely to be sharp.

When global investors flee for safety, one of the first places they escape to is the Japanese yen. The best way to play this for short-term profits is this week’s Global Bull Market Alert pick, the CurrencyShares Japanese Yen Trust (FXY). FXY seeks to replicate the performance of the JPY/USD daily price change.

The investment case for the Japanese yen is simple: when global markets zig, the yen tends to zag. Even as global markets tumbled on Friday and this morning in Asia, the yen surged against the dollar, and other major currencies. And if the Goldman story has any legs, it will trigger a further surge in safe-haven demand for the Japanese currency. Recall that the yen was one of the best-performing assets during the financial meltdown in the fall of 2008.

So, buy the CurrencyShares Japanese Yen Trust (FXY) and place your stop at $104.25. I am not recommending any options for this one.

Portfolio Update

Aixtron AG Ads (AIXG) recovered somewhat early in the week, but sold off sharply with the market on Friday. With both the fundamentals and technicals intact, AIXG remains a BUY on any pullback.

Cognizant Technology Solutions Corp. (CTSH) hit another yearly high of $53.93 on Wednesday, before pulling back on Friday’s sell-off, and ending the week 2% higher. Cognizant entered a multimillion-dollar strategic engagement to provide software development services for the Harris Corporation. CTSH remains a BUY.

UltraShort Euro ProShares (EUO) ended the week slightly lower. The euro fell on Friday due to concerns about how Greece will service its debt, while the dollar and the yen gained as falls in equity markets led investors to cut positions in riskier currencies. I’m moving your bet against the European currency back to a BUY.

Millicom International (MICC) hit a yearly high of $92.03 on Thursday, before pulling back sharply on Friday. Millicom has announced plans to pay a special dividend of $4.60 per share, in addition to the proposed 2009 annual dividend of $1.40. The special dividend will be worth $500 million. An additional $300 million will be used to buy back shares from open market purchase on NASDAQ by the end of 2010. Both of these decisions are, however, subject to the approval of shareholders at the Annual General Meeting on May 25, 2010. MICC remains a BUY.

Mechel (MTL) hit a yearly high of $31.79 last Thursday. With Citibank upgrading the stock to a BUY from a SELL(!), this highly volatile Russian stock remains a BUY.

China North East Petroleum Holdings Ltd (NEP) shot through the $10.00 level last week on Thursday, before pulling back on Friday’s sell-off. Despite the company’s current regulatory challenges with the SEC and AMEX, NEP remains a BUY.

P.S. Don’t miss out on the 22nd annual MoneyShow Las Vegas, May 10-13 2010 at Caesars Palace. This event will be your one-stop resource for the comprehensive education, efficient research, and valuable advice you need to make smart investment decisions in 2010 and beyond. Join me there and hear leading experts reveal where they see growth opportunities in stocks, bonds, ETFs, commodities, and options. Also learn about which overseas markets may outperform in the near term. Visit The MoneyShow Las Vegas to register FREE online, or call 800/970-4355 and mention priority code 017443 today!

P.P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy.

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