Your Currency Bets Hit Record Highs — And a Leveraged Bet On a Short-Term Bounce

Because relatively steady currency bets make up the core of your portfolio, this week’s Global Bull Market Alert pick, the Ultra S&P500 ProShares ETF (SSO), takes on some risk. This leveraged ETF seeks a return that doubles the daily return of the S&P 500 and is a bet on a short-term bounce in the remarkably oversold U.S. markets between here and election day.

On Friday, none other than the Warren Buffett, the sage of Omaha, announced that he was shifting some of his cash holdings into major U.S. stocks. In an article published in The New York Times on Friday, Buffett admonished investors not to keep their investments in cash. Buffett wrote: "I’ve been buying American stocks. A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread."  Now Buffett makes no claim as a market timer. Nevertheless, he has had some good calls — such as selling out of China’s Petrobras (PTR) near the top of the Chinese mania in the summer of 2007.

Buffett, of course, is a long-term investor. But the real reason for betting on a bounce in the markets is more technical and short term. Below are my top three key technical indicators that are hinting that equity markets are very close to forming an intermediate market low.

First, risk aversion as measured by the VIX volatility index — Wall Street’s fear gauge — has literally gone off of the charts. The VIX hit a record of 76 on Friday Oct. 10 and then reached 81 on Oct. 15. These measures are so extreme that they are literally without historical precedent. Why is this a bullish signal? Extreme readings on the VIX have been a terrific contrarian indicator and have consistently marked major turning points in the stock market.

Second, trading data from the New York Stock Exchange (NYSE) confirms this never before seen level of bearish sentiment. On October 20, 1987, when the stock market crashed, there were 1,174 new lows on the NYSE — about 57% of the 2,076 issues that traded that day. That was a record that held until just recently. On Friday, October 10, 2008, there were 2,901 new lows on the NYSE — about 88% of the 3,306 issues traded — blowing the old record out of the water. After such indiscriminate selling by investors, the next move in the market is far more likely to be up than down.

Third, James Altucher, of hedge fund Formula Capital, has calculated that if you had bought the S&P 500 index every time in the past 33 years on the day that it had fallen 20% below its 200-day moving average, you would have shown an average profit of 10% on the 20th trading day afterward on every single occasion. That’s 34 consecutive winning trades. How does this apply to today’s market? The S&P 500 fell 20% below its 200-day moving average of 1,325 on Oct. 6.  Assuming this strategy continues its 100% track record during the past three decades, the S&P 500 should trade above 1,060 on Thursday, Nov. 6, two days after the U.S. presidential election.

So buy the Ultra S&P500 ProShares ETF (SSO) and place your stop at $20. Because this ETF attempts to double the daily return of the S&P 500, it will be a VERY volatile pick in VERY volatile market. It can swing as much as 15-20% per day, so you may want to reduce your position size accordingly. Given the already huge volatility of this ETF, I’m not going to recommend options on this one.  

PORTFOLIO UPDATE

The Direxion Funds Dollar Bull 2.5x Fund (DXDBX) hit yet another a record of $39.57 this week. I expect the dollars bullish trend against all major currencies to continue.

The Market Vectors Double Short Euro ETN (DRR) also closed at yet another new record high of $52.60 on Friday as the euro continues to come under pressure.

The CurrencyShares British Pound Sterling Trust (FXB) rose slightly this week, which was negative for your short position. No matter. After rising briefly last week, the pound sterling has already resumed its downward trend.

The CurrencyShares Japanese Yen Trust (FXY) was broadly flat over the week. Expect the yen to continue its steady ascent upward as the “carry trade” unwinds.

P.S. Surging oil and food prices, as well as deteriorating economic confidence, have stoked inflation fears around the world in recent months, leaving volatile markets and jittery private investors in their wake. In times such as these, it’s good to have this forum to discuss key developments and to hear from the best financial minds in the world. I invite you to join me at the 4th Annual World Money Show London, 14-15 November, at the Queen Elizabeth II Conference Centre. Call 800/970-4355 and mention priority code 009613 or visit The World Money Show London to register FREE today!