Risk On, Risk Off

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
It was yet another “Risk-On, Risk-Off” week in the markets.
Traders opened the recent five-day trading period by piling into “risk-on” assets, like equities and commodities. They ended the week with a flight into “risk-off” instruments, such as U.S. treasuries and the dollar. Neck-snapping swings in the S&P 500 meant that volatility, as measured by the Volatility Index (VIX), soared. Weeks like these can be a hair-raising experience for the average investor. But they also create fantastic buying opportunities.
Stocks tumbled over the past two days on renewed concerns over Europe’s ability to solve the Greek banking crisis. News that Greece may disrupt implementation of the euro-zone bailout by putting the austerity plan to a referendum also put markets back on edge.
The good news is that massive declines like those witnessed over the past two days, accompanied by spikes in volatility, often end with a strong short-term bounce in the markets. Taking a broader perspective, since 1928, there have been only four other times in which the S&P 500 Index lost 2% or more on the last day of a month, and gained 2% or more on the first day of the next month. Each time this happened, markets rallied at least 11% into the end of that month. Friday’s reversal also occurred very near the S&P 500 Index’s 200-day moving average — no small line-in-the-sand. Markets could now be setting up for a strong bounce off of the 50-day moving average as the S&P 500 re-tests the 1,210 resistance levels it has revisited so often over the past quarter.
Your Alpha Investor Letter portfolio ended the week mixed. The one standout performer was Las Vegas Sands Corp. (LVS), which soared 12.13% on a positive earnings report. Your bets on Asia, South Korea (EWY) and Malaysia (EWM), ended the week higher, as did your bet on iShares JPMorgan USD Emerging Market Bond (EMB). Although down for the week, your bet against China, via ProShares UltraShort FTSE China 25 (FXP), jumped over the last three days as markets sold off sharply.
Despite the recent sell-off, several positions of your watch list are now trading above their 50-day moving averages. Based on that rule of thumb, I am recommending that you enter the following positions:
Listed Private Equity ETF (PSP); set your stop price at $7.00.
iShares MSCI Hong Kong Index (EWH); set your stop price at $13.00.
Freeport McMoRan Copper & Gold Inc. (FCX); set your stop price at $28.00.

Portfolio Update

WisdomTree Japan SmallCap Dividend Fund (DFJ) dipped 3.45% for the week. The Japanese central bank is weakening its currency by selling the yen in large quantities. The amount sold Monday alone was nearly 7 trillion yen ($90 billion). A weaker currency gives a healthy boost to corporate profits by boosting exports. DFJ is now a HOLD.
Las Vegas Sands Corp. (LVS) jumped 12.13% over the past week. LVS spiked late last week on a positive earnings report that showed revenues grew by 26% over the same period last year. Overall, Macau’s October gambling revenue soared 42%. “Asia’s Las Vegas” is currently a BUY.
ProShares UltraShort FTSE China 25 (FXP) gave back 6.86% last week. However, FXP bounced off its well-tested $27.50 support level as equities sold off broadly. FXP is currently a HOLD.
MSCI South Korea Index (EWY) remained flat, rising 0.42%. South Korean corporate giant Samsung reported a good quarter on Friday, beating analyst expectations. EWY is an excellent way to gain exposure to Samsung’s Apple-thumping world dominance in the smartphone market. EWY is a BUY.
MSCI Malaysia Index (EWM) rose 0.75% during the past five trading days. EWM has been trading nearly in tandem with your EWY position and the broader emerging markets. EWM touched its 50-day moving average during Tuesday’s trading session and closed just above it. EWM is a BUY.
First Trust NYSE Arca Biotech Index (FBT) fell 2.07% last week. FBT is an “equal-weighted” index fund, meaning it locks in profits on its winners and purchases shares in biotech firms that have not yet participated in the broader bio-tech rally. After a healthy two-week run, FBT dropped just below its 50-day moving average and is now a HOLD.
Market Vectors Russia ETF (RSX) came in flat, losing just 0.99%. RSX has been on a tear since bottoming last month and has taken a breather the past few days, along with the broader markets. RSX dipped below its 50-day moving average on Tuesday and is a HOLD.
iShares JPMorgan USD Emerging Markets Bond (EMB) rose 0.83%. This safe-haven pick provides exposure to emerging market debt. Denominated in U.S. dollars, EMB is protected against the sharp drops in the value of emerging markets currencies like you saw in September. EMB is a BUY
Market Vectors Indonesia Index ETF (IDX) dropped 2.36%. IDX has rocketed 16% during the month of October. Yet, surprisingly, IDX is still 18% off of its 52-week high. IDX pulled back over the past few days and is currently a HOLD.

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For the week, the Nasdaq and the S&P 500 each advanced 3.8%. With only a day of trading left in October, the U.S. major indexes have gained between 12% and 15% for the month. The MSCI Emerging Markets Index is up over 20% this month.
Last Thursday, you took profits in Spreadtrum Communications (SPRD) options by selling your remaining $20 calls for a gain of 107%, as the stock rose 13.01% for the week. It is now up 28.69% since you bought it.


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