Holding On Tight… and Hedged

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
All three major U.S. equity indices are coming off of their worst quarterly performances since the financial crisis kicked off in late 2008. For the week, the stock market was mixed. The Dow rose 1.3%, and the Nasdaq dropped 2.7%, while the S&P 500 eased 0.4%. All closed near the week’s lows.
It has been a lousy, lousy year so far. When I glanced at the back page of the Economist magazine last Thursday — the page where the yearly performance of all global stock markets is summarized each week — not a single stock market on the planet was in the plus column. As I pointed out on CBS Marketwatch last week, most global stock markets are in bear-market territory, having fallen more than 20% from their peak. Hence your current, leveraged short position in emerging markets through your holding in ProShares UltraShort MSCI Emerging Mkts (EEV).
That markets are doing so poorly is highly unusual. The third year in the presidential election cycle has been traditionally positive for the U.S. stock market. Between 1948 and 2008, the U.S. S&P 500 has risen by an average of 22.34% in the third year of a Presidential Election Cycle. To match that average gain, the S&P 500 would have to rally to 1,555 over the next three months — up 37.5% from its current levels. If this continues, the White House may be forced to abandon its plans to have Obama’s face chiseled onto Mt. Rushmore as part of its new job-creation package.
With the relentless bad news out of Europe, I was extremely tempted to recommend a leveraged short position in European stock markets this week through ProShares UltraShort MSCI Europe (EPV). This exchange-traded fund (ETF) acts the same way as your current position in ProShares UltraShort MSCI Emerging Mkts (EEV), except it is linked to MSCI’s Europe Index. And the investment case against European stock markets — to quote the investment prospectus of Peruvian silver mine from the 1860s — “is so clear it need not be discussed.”
But here’s why I’m not. Technically, global markets are short-term oversold. And the U.S. S&P 500 is near enough to its Aug. 10 low of 1,120 at the bottom of its current trading range of 1,120 to 1,220 that it is due for a bounce. Corporate earnings will start picking up two weeks from now, and may give the stock market a boost. And we are entering a seasonally stronger time of the year when global markets tend to rally.
Until then, our strategy remains the same. Stick with relatively strong stocks, and hedge on the downside. And as always, stick to your stops.

Portfolio Update

Alliance Resource Partners L.P. (ARLP) dropped 2.72% this past week. ARLP continued to dip as commodities continued their correction. ARLP reports earnings on Oct. 26. ARLP is below its 50-day moving average and remains a HOLD.
Bank of Ireland (IRE) remained flat for a second week, losing 0.96%. IRE’s stock price continued to bobble as authorities took two steps forward and one step back again last week. One positive development could send this option-like position soaring at any time. IRE remains a HOLD.
National Bank of Greece SA (NBG) fell 2.50% over the past five trading days. Greece approved $8.8 billion in additional austerity measures, and plans to fire 30,000 public sector workers. This move not only helps decrease massive budget deficits, but also provides evidence of Greece’s willingness to make the hard choices, as well as brings it closer to receiving its sixth bailout installment of rescue funding. NBG is a HOLD.
Spreadtrum Communications, Inc. (SPRD) took a 9.11% hit last week. Spreadtrum sold off sharply along with many other Chinese technology stocks as the Securities and Exchange Commission (SEC) announced increased scrutiny of the sector. However, SPRD jumped on Friday, after it announced that it will receive more than $8 million in research and development grants to ramp up China’s TD-SCDMA communications infrastructure. These funds will directly benefit SPRD’s bottom line and further strengthen its balance sheet. SPRD will pay a $0.05 dividend on Oct. 6. With SPRD bouncing off of its 50-day moving average, SPRD remains a BUY.
ProShares UltraShort MSCI Emerging Mkts (EEV) rose 2.72% during its first week in your portfolio and was the bright spot in an otherwise tough week. Do not expect to hold this position long. Its role is more as a hedge against large market drops. Trading above the 50-day moving average, EEV remains a BUY.

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The roller-coaster ride continued last week as the S&P 500 Index bounced off of the 1,120 level yet again. In the end, the S&P 500 Index dropped 2.66% and the MSCI Emerging Markets Index fell 4.15%. That made it the worst week that the S&P 500 has experienced since the global meltdown three years ago.
Much of last week's uncertainty was in response to the U.S. Federal Reserve's version of “The Twist.” Simply put, the Fed is selling its sh


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