Good news from the major U.S. banks and better than expected retail sales, as well as housing starts, have lit a fire under global stock markets over the past week. Investors in U.S. banks have doubled their money in the past two weeks. Fear has turned into greed overnight.
At times like this, it can be a challenge to hold on to a balanced, risk management oriented portfolio that moves independently of stock markets.
At the same time, the market’s recent action has all the markings of a classic bear market rally: a technically oversold stock market, extreme pessimism, and sharp moves upward driven by a combination of greed as well as short covering. That’s what makes bear market rallies particularly treacherous and psychologically challenging.
Global stock markets will turn at some point. But it’s only with the benefit of 20/20 hindsight that we’ll know when that is. The recent behavior of the market reminds me much of the bear market from 2001 through 2003. You have to run hard just to stay in place. A relief from the relentless doom and gloom of the media is welcome. But a few days of positive news is not sufficient to alter your Global Stock Investor strategy.
Not surprisingly, your sole stock position, the Chemical & Mining Co. of Chile Inc. (SQM), has been the star performer in the portfolio, rallying a solid 11.4% since bottoming on March 9. It is a BUY.
This month’s pick, a bet against the euro through the UltraShort Euro ProShares (EUO), got off to a slow start as risk appetite returned to the markets. Nevertheless, the fundamental case against the unified currency — which economist Milton Friedman predicted 10 years ago would break during Europe’s first real economic crisis — remains firmly intact. It is a BUY.
The Chinese yuan, through the WisdomTree Dreyfus Chinese Yuan Fund (CYB), rose slightly this week even as traders expect the Chinese central bank to keep the yuan in a narrow range against the dollar. It remains a defensive BUY.
The UltraShort Lehman 20+ Treasury ProShares (TBT) has rallied along with the equity markets. The big question mark is whether the Fed will introduce “quantitative easing” and begin buying up the U.S. government’s own Treasury notes and bonds. When the United Kingdom did the same last week, U.K. gilts rallied and yields collapsed. If the United States did the same, it would have a sharp, negative short-term impact on TBT — especially as it is leveraged. Nevertheless, the longer-term story driving this pick — rising inflation and the U.S. government’s record funding needs — remains intact. In fact, TBT is back near its record highs. TBT remains a BUY.
Your position in the PowerShares DB Commodity Double Short ETN (DEE), which we put on a HOLD, has suffered as markets have rallied, and now is near its stop price of $82.00.
The WisdomTree Dreyfus Chinese Yuan Fund (CYB) rose slightly this week, as the yuan recovered from a slight sell-off in the past week or so. I have moved CYB to a BUY.
PowerShares DB Commodity Double Short ETN (DEE) has sold off sharply, as it generally correlates inversely with global stock markets. With the position near its stop price of $82.00, I am keeping this at a HOLD.
UltraShort Euro ProShares (EUO) fell in its first week in the portfolio as the euro clawed its way back above the $1.30 level. That makes it a good time to add to your position here. The euro may see $1.10 in the next six months. EUO is a BUY.
Chemical & Mining Co. of Chile Inc. (SQM) has rallied with the market in the past week or so. This combination lithium and agricultural chemical play remains a BUY.
UltraShort Lehman 20+ Treasury ProShares (TBT) has rallied a solid 8% since bottoming on March 5. TBT is now very near its record highs last seen in early February. Although the potential of quantitative easing presents a significant short-term risk to the downside for this position, TBT remains a BUY.
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