Sticking with What Works in a Wild World

Over the last 10 or so trading days, global markets have been in the midst of a good, old-fashioned bear market rally. Last week’s holiday-shortened Thanksgiving week was marked by the stock markets closing higher for five consecutive trading days — a rare winning streak that happened last in July 2007. The S&P 500 Index gained 19.1% since the start of the rally on Nov. 21 and its 12% gain last week was its largest since 1974.

The market’s performance looks less flattering for the entire month of November. Its recent strong gains notwithstanding, the S&P 500 fell 3.6% last month. The Dow was down 1.8%, while the Nasdaq fell 7.2%. On the year, the S&P 500 is down 39% and the Dow is down 33%.

If this were a normal year, I would be more bullish. The post-Thanksgiving period through the end of the year has usually been a strong time for stocks. December is normally a banner month for stocks, ranking second on the monthly calendar for the Dow and S&P 500 and third for the Nasdaq.

Here’s why I remain skeptical. First, bear markets do not end with soaring countertrend rallies like we’ve had over the past 10 days or so. Second, a bit of a long-term perspective is in order as well. Lipper Research recently found that only 36 of 745 ETFs that it followed recorded gains over a rolling 12-month period. And 32 of the 36 were short-selling vehicles. In fact, there wasn’t a single equity ETF that showed gains for 2008.

And what were the four gainers out of 745? A short-term U.S. treasury ETF and three global currency plays — the very same themes that constitute the bulk of your Global Bull Market Alert portfolio.

As much as I continue to research other investment opportunities, I continue to believe that currencies are the only safe game in the global investment universe. Every single one of your currency positions remains up by double-digit percentages, even as they have pulled out of their record highs. And I expect this to continue.

Portfolio Update

The European Central Bank (ECB) is expected to cut interest rates by 50 to 75 basis points on Thursday after the ‘flash’ Eurozone CPI estimate collapsed, confirming that inflation is not much of a problem in the Eurozone. The euro is continuing its slide against the dollar in this morning’s trading. This is bullish for your position in the Market Vectors Double Short Euro ETN (DRR).

And with the U.K. economy sliding deeper into recession, the Bank of England is increasingly likely to slash its key interest rate for the third time in as many months and may prompt the government to launch a second fiscal stimulus package next year. This is good news for your short position in the CurrencyShares British Pound Sterling Trust (FXB). Both bits of news are bullish for the Direxion Funds, Dollar Bull 2.5x Fund (DXDBX). You should feel comfortable in adding to all of these positions.

With global markets rallying as they did, your short position in the iShares MSCI United Kingdom Index (EWU) did not have a good week. Not to worry. The pound is already back on its downward path, and the U.K. market is off 2.5% in this morning’s trading.

The CurrencyShares Japanese Yen Trust (FXY) held steady this week. Because it is unleveraged, it has been the least volatile of your current positions. It also offers the least upside.  

But as of last week, there is a new and leveraged way to play the Japanese yen through the ProShares Ultra Yen (YCL). This ETF’s objective is to seek daily investment results, before fees and expenses, that correspond to twice (200%) the U.S. dollar price of the yen. Think of this ETF as a 2X leveraged version of the CurrencyShares Japanese Yen Trust (FXY).  

So if you’re looking for more bang for your buck in your long Japanese yen position, buy the ProShares Ultra Yen (YCL) at market and place a 15% trailing stop on the position. A word of warning: this is a spanking new ETF and has limited liquidity. So you might want to start off with a relatively small position, and monitor how its liquidity develops.