The Pen Really is Mightier than the Sword

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Two wars, massive debt, homeland terrorism, hurricane/tornado devastation — it seems that nothing actually could bring the United States of America to its knees. Yet, with a single credit rating-lowering pen stroke, the strongest nation on Earth could sustain a blow arguably more devastating than all of these incidents put together. It would seem that the pen is truly mightier than the sword after all…

This same threat took a toll on the U.S. stock market, sending it on its longest losing streak since the financial meltdown of 2008. The Dow Jones Industrial Average fell 2.2% and the S&P 500 declined 2.6% — just on Tuesday alone. This handed the major American indexes their worst day in more than two months. In addition, the Dow Jones saw its eighth straight day in the red on Tuesday, thanks in part to a Commerce Department report that reflected the first decline in monthly consumer spending in 20 months. The Dow Jones closed below 12,000 for the first time since June 24.
The drama surrounding the U.S. government’s debt-ceiling hullaballoo has left a wake of credit-rating damage. The Moody’s Investors Service re-affirmed its AAA rating of U.S. government debt on Tuesday, but assigned it a “negative outlook.” The Fitch ratings agency did largely the same. The most recent development, carrying less weight than the American firm’s calls, saw China’s Dagong Global Credit Rating agency cut its credit rating on U.S. sovereign debt to A from A+. The agency also placed a “negative outlook” on U.S. debt.
Not surprisingly, your Alpha Investor Letter portfolio had a rough week as well. Only a few holdings escaped the assault, and several moved to a HOLD status. However, the bulk of the status changes happened on Tuesday, and falls below the 50-day moving average were generally slight. The Market Vectors Indonesia ETF (IDX) and WisdomTree Dreyfus Chinese Yuan Fund (CYB) actually ended the week up slightly. Asian positions endured as well.
Your positions in ProShares UltraShort Lehman 20+ (TBT) and First Trust NYSE Arca Biotechnology (FBT) hit their stop prices. Both picks are on our Watch List for now. The sharp move in TBT is particularly perplexing as interest rates continue to tumble, despite the Washington budget mess.
From a technical perspective, the S&P 500 index made a sharp move below the 200-day moving average. This could be an ominous sign and lead to a serious downturn in the markets. On the other hand, markets are greatly oversold. With such negative sentiment, and so many consecutive down days, one could expect a bounce over the next week or so. Even a modest bounce may see many of your HOLD positions quickly move back to BUYs. As always, be sure you have the recommended stops set for each of your portfolio positions.

Portfolio Update

WisdomTree Dreyfus Chinese Yuan Fund (CYB), in the face of global market mayhem, managed to rise 0.16% over the past week. The steady hand of the Chinese government continues to ensure that the course of the Chinese yuan remains “steady as she goes”. CYB is above its 50-day moving average and is a BUY.
WisdomTree Japan SmallCap Dividend Fund (DFJ) fell 2.48% over the past week. DFJ pulled back slightly due to the overall decline in world markets. Rest assured, the Japanese recovery remains intact. Holding well above its 50-day moving average, DFJ is a BUY.
iShares MSCI Singapore Index (EWS) fell 1.26% last week. The Asian/Pacific region has fared well relative to the events of the U.S. debt-ceiling crisis. Singapore endured all of its losses for the week on Tuesday alone. EWS is a BUY.
iShares MSCI Malaysia Index (EWM) declined 1.25% for the week. Trading in lock-step with your Singaporean ETF position, EWM’s losses also were minimal for the week. Ending the week just below its 50-day moving average, EWM is back to a HOLD.
iShares MSCI South Korea Index (EWY) lost 4.25% last week. Although falling just recently, this ETF is still a strong buy. According to a recent article by Tom Aspray, one of my MoneyShow colleagues, EWY is “one of three strong S&P-beating global ETFs” (the other two picks were IDX and EWS). This ETF remains a sound bet, based upon its strong technical indicators and good fundamentals. However, EWY slid under its 50-day moving average today and is now a HOLD.
iShares MSCI Taiwan Index (EWT) fell 3.50%, erasing last week’s gains. As of late last week, EWT set a new 90-day record for option call contract volume. The volume of puts (betting the ETF moves lower) was 1,323 and the volume of calls (betting the ETF moves higher) was 4,854. This positive sentiment among option investors is often a strong indicator of future price upward movement. EWT fell below its 50-day moving average on Tuesday and is now a HOLD.
Freeport-McMoRan Copper & Gold Inc. (FCX) dropped a surprising 8.27% last week. That’s especially surprising, since FCX recently reported a very strong quarter with Q2 profit more than doubling. FCX also is benefiting from soaring copper and gold prices. In addition, it recently declared a $0.50/share “special dividend” on top of its normal quarterly dividend. Finally, it just was upgraded by Standard & Poor’s. Even with this plethora of good news, this volatile position fell a few cents below its 50-day moving average today and now is a HOLD.
Market Vectors Indonesia ETF (IDX) managed a 0.18% gain last week — likely the only stock market in the world to do so. IDX remains a strong position with a very positive chart pattern. IDX is trading well above its 50-day moving average and remains a BUY.
JinkoSolar Holding Co., Ltd. (JKS) dropped 5.92% over the past five trading days. The Pacific Crest rating agency recently rated JKS as an “Outperform” and assigned a $33 price target — a 50% (!) upside from its closing price yesterday. From a technical standpoint, JKS is at a strong support level and safely above our stop price. A positive earnings report may make this play on solar shine brightly once again. JinkoSolar reports earnings on Aug. 16. JKS is currently below its 50-day moving average and is a HOLD.
Las Vegas Sands Corp. (LVS) dropped a mere 1.51% for the week — an impressive performance in the face of such negative market sentiment. Its positive earnings announcement on July 26 and an upgrade to “Buy” by the Argus rating agency both supported the stock. Comfortably above its 50, 100, and 200-day moving averages, LVS is still a BUY.
Market Vectors Russia ETF (RSX) fell 4.69% last week. Following a consistent “rolling” chart pattern since May, RSX has once again retraced to a support level. Expect this position to roll in a positive manner once market sentiment improves. Dipping slightly below its 50-day moving average, RSX is a HOLD.
Vale S. A. (VALE) fell 5.99% last week. VALE reported disappointing Q2 earnings on July 28. However, VALE predicted stable iron-ore prices for the next five years and believes ore demand, production, and sales will increase during the second half of 2011. VALE breeched its 50-day moving average today and is now a HOLD.
Market Vectors Gold Miners ETF (GDX) fell 3.05% over the past week. Although losing ground over the entire week, GDX has turned around in the past couple of days. With the Washington debt-ceiling deal doing little to solve any real spending problems, the momentum on gold likely will continue. Demand for gold is set to increase as the South Korean central bank recently acquired 25 tons of gold. This is a 100% increase in South Korea’s gold reserves, as well as its first gold purchase in the past ten years. GDX is a BUY.

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