‘Trump On’ or ‘Trump Off’ for the Market?

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

If you’ve been watching markets on a daily basis, as I have for the past 20-plus years, you know that there are various periods when trading has shown certain specific characteristics.

In the 1990s, it was “buy the dip” in Internet stocks. After the financial crisis, and for most of 2009 through Election Day 2016, the markets traded in what was known as “risk on” or “risk off” patterns.

For most of the past seven years, getting the market right meant knowing when to go risk on (moving into stocks) and knowing when to be risk off (moving out of stocks and into bonds, gold and cash).

Now, the markets have quickly transitioned from risk on/risk off to “Trump on/Trump off.”

This is an observation first pointed out to me by my friend and uber-smart colleague Tom Essaye of The Sevens Report, and it’s one that I very much concur with.

In essence, the Trump-on trade means money is moving into stocks (especially cyclicals) and the U.S. dollar is appreciating. The Trump-on move also means money is flowing out of bonds and out of gold.

It largely is the reverse with Trump off. That means stocks fall, the dollar declines and bonds and gold trade higher. Here’s how Tom explained it to me:

“If past is prologue, and markets are still enormous pools of central-bank-supplied money sloshing from one strategy (risk on or Trump on) to another (risk off or Trump off), then the key to getting this market right, especially in the beginning of 2017, will be knowing whether the policy efforts from Washington and economic data are positive or negative.”

Bingo! Hey, I told you he was uber smart.

With Trump’s official swearing in to office less than 48 hours away, getting the market right in 2017 — and knowing which sectors of the market to embrace — will be largely a matter of knowing about the nitty-gritty political developments influencing the Trump/Republican agenda.

Issues such as regulatory reform, fiscal stimulus and Obamacare repeal and replace all are important market movers, particularly in the first 200 days. Yet by far the biggest market-moving policy is corporate tax reform. And, the reason why is simple.

If corporate tax reform can get passed, and if the corporate tax rate can go down to 15% or 20%, then that will be a huge windfall for corporate bottom lines. And, that would easily send stocks on a Trump-on rocket ride to all-time highs.

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So pay close attention to politics, as that will determine the Trump-on/Trump-off trade in 2017 and likely well beyond.

If you’d like to find out exactly how we’re taking advantage of the Trump-on/Trump-off trade in markets this year, then I invite you to check out my Successful ETF Investing advisory service, today.

A Special Announcement

For nearly four decades, I have been involved in writing my family’s newsletter, Successful ETF Investing, along with the ancillary publications such as this one.

I want to tell you that it’s been the honor and a privilege of a lifetime to have had the opportunity to serve you in my capacity as editor of this service. However, now it’s time for me to step down from my post, and to pursue new opportunities for myself and my family. Toward that end, I am joining a national wealth management firm to better serve my current wealth management clients, and to help more families on an individual basis build and growth their wealth.

This move not only requires my full attention, it also comes with a set of regulatory rules that require that I am only involved in one investment business. And while I would have liked to have continued my tenure as editor of this publication, I have too much respect for you, the reader, to ever short-change you with anything less than my full attention.

So, effective Feb. 1, I will be handing off my editorial responsibilities to my Senior Writer, Jim Woods.

I’ve worked with Jim on the Weekly ETF Report, as well as on my Successful ETF Investing newsletter, for nearly 14 years. He has been my editor for most of that time, and he’s been the wordsmith behind the scenes. Jim will be assuming the duties of editor from here on, and I must tell you that I could not have left my publications in better or more eminently capable hands.

In addition to being my right-hand man at this publication over the past 14 years, Jim also is extremely accomplished in the industry. He has written for numerous publications, including MarketWatch, Traders Reserve and InvestorPlace.

Jim also is an accomplished stock picker. In the five-year period from 2009 to 2014, the independent firm TipRanks ranked Jim the No. 4 blogger in the world (out of more than 9,000). TipRanks calculates that from 2009 to 2014, he made 378 successful recommendations out of 506 total, earning a success rate of 75% and a 16.3% average return per recommendation.

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These are the kind of capable hands I’m talking about, hands that I know will take expert care of this service.

Time to Put Commodities on the Radar

Stocks went near-parabolic after the Trump win, but since about mid-December, the SPDR S&P 500 ETF (SPY) has basically treaded water, stuck in about a 1% trading range.

Traders here are likely waiting for the next big, as Jim Woods explained, Trump-on trigger to get long. Or, they also could be anticipating a Trump-off trigger.

SPY 1-18

Now, while stocks are waiting for a clear signal to move in either direction, one segment of the market has made its call already… commodities.

Look at the chart below of the WisdomTree Continuous Commodity Index Fund (GCC). This diversified commodity fund holds metals, agricultural commodities, cattle futures, coffee, sugar… you name it, GCC holds it.

GCC 1-18

As you can see, the fund hit a multi-month low in December. Since then, however, the fund has roared back up above both the short-term, 50-day moving average, as well as the long-term, 200-day moving average.

It’s also done so with a bullish technical pattern known as a “double bottom” (see circled section on chart).

Now that we’ve seen commodities come roaring back, it’s time to put this segment on our radar again, as it could mean a nice investment opportunity going forward.

ETF Talk: This Fund Lets You Invest in Chinese Real Estate

A niche exchange-traded fund (ETF), the Guggenheim China Real Estate ETF (TAO), tracks a cap-weighted index of investable Chinese and Hong Kong real estate companies and real estate investment trusts (REITs).

This is a pure-play fund which has its entire investment portfolio in the Chinese real estate equities market. However, TAO is not exactly a mainland China play, as 80% of TAO’s 50 holdings are Hong Kong companies.

TAO offers liquid access to the Chinese real estate sector and provides growth opportunities based on major urbanization trends that are propelling the demand for real estate in China. Factors to watch for are the increasing strength in the big banks of China and China’s monetary policy of relaxing mortgage rates and down payment requirements, which are crucial for house buyers.

TAO has a relatively high expense ratio of 0.70%, possibly due to its risky nature, and can have high transaction costs as it is thinly traded. The fund has $55.96 million assets under management and a dividend yield of 1.99%. This figure puts it below my recommended threshold for investment, but its strategy is one that is worth bringing to your attention.

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In the graph below, you can see that TAO pounced higher after a slow start at the beginning of 2016. The price of the fund surged from a low of around $16 to a high of $23 before settling at a price of around $21 recently. The fund’s one-year return was 15.30%, versus the S&P 500’s one-year return of 11.96%.

TAO 1-18

TAO’s top five holdings are Hongkong Land Holdings Ltd., 5.21%; The Wharf Holdings Ltd., 5.19%; Sun Hung Kai Properties Ltd., 5.05%; China Overseas Land & Investment Ltd., 5.02%; and Link Real Estate Investment Trust, 4.93%. The top 10 stocks have historically represented a significant percentage of this ETF. As of now, they make for roughly 50% of the fund’s total assets.

This fund is best considered as a high-risk, high-reward play for investors seeking further exposure to the Hong Kong region but wanting to stay away from the large, multinational holdings. A potential investor would need a strong belief in the further urbanization in China and Hong Kong, as well as the continuing appreciation of current real estate properties.

If this sounds like you, I encourage you to look to Guggenheim China Real Estate ETF (TAO) as a starting point for your research.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Inaugural Wisdom from Long Ago

“When the best leader’s work is done, the people say, ‘We did it ourselves.’”

— Lao Tzu

Chinese philosopher Lao Tzu long ago offered up a bit of wisdom for all politicians. That wisdom, reflected in the quote above, reminds those in power that real success comes with engineering circumstances such that the people want to share in the responsibility. Mr. Trump, are you listening?

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Jim.

In case you missed it, I encourage you to read my e-letter article from last week, which is part II of the case for going international.

previous article

U.S. stock markets traded essentially flat over the past week. The Dow Jones was down 0.16%, the S&P 500 fell 0.09% and the Nasdaq eked out a 0.15% gain. The MSCI Emerging Markets Index (EEM) continued to outperform into the New Year by rising 1.50%. George Soros’ top bet -- Liberty Broadband (LBRDK) -- was the week’s big winner, rising 3.27%. Your two emerging markets bets -- the Cambria Global Value ETF (GVAL) and the WisdomTree Emerging Mar

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