A Bet on the First Bull Market of 2009

Nicholas Vardy

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

If market sentiment continues to be weak, you can expect your positions in the Japanese Currency Trust (FXY), the ProShares Ultra Yen (YCL), the PowerShares DB Commodity Double Short ETN (DEE) and your short position in the iShares MSCI United Kingdom Index (EWU) to do well.

Meanwhile, if market sentiment turns positive, as it did on the first trading day of the year last Friday, you can expect highly volatile, bullish positions like Millicom International Cellular S.A. (MICC) to soar.

This week’s Global Bull Market Alert pick, iShares MSCI Emerging Markets Index (EEM), is a “top down” bet on a rally in highly volatile emerging market stocks. It also increases the size of our bullish bet on a short-term rally in the markets. Here’s why I expect EEM to trade sharply higher over the coming weeks.

First, trading at an average price-to-earnings (P/E) ratio of under nine, emerging markets are as cheap as they have been since the mid-1990s. They’ve also come out of their worst year in recent memory with the much-vaunted BRIC stock markets — Brazil, Russia, India and China — all falling well over 60% in 2008. In my experience, it is remarkable how the worst-performing markets of one year tend to be the best-performing markets of the next. That bodes well for 2009.

Second, from a trading perspective, January traditionally tends to be one of the strongest months of the year for emerging market stocks. In fact, December already was, and emerging market stocks have soared 31.15% from their bottom on Nov. 20. More than half of global stocks are now trading above their respective 50-day moving averages. That compares with almost zero in October.

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Third, screaming negative headlines notwithstanding, the internal technical indicators in global stock markets are steadily improving. Stock market lows are holding and bases are forming. The advance/decline line which tracks the difference between advancing and declining issues has been moving in the right direction since the November lows and is actually again in positive territory.

The surprising conclusion? Emerging markets are already in a bull market. So BUY the iShares MSCI Emerging Markets Index (EEM) at market today and place your stop at $20.20. If you want to play the options, I recommend the June $28 call options (EEMFH.X). Here’s a word of warning. You can expect this holding to be almost as volatile as your position in Millicom. So depending on your own risk tolerance, you may want to take a smaller than normal position.

Portfolio Update

The Japanese Currency Trust (FXY) and the ProShares Ultra Yen (YCL) both fell sharply on Friday, and have fallen back from their record highs in mid December, as risk appetite returns to global financial markets. You’ve taken profits in half of your positions and tightened your stops in both positions. Keep an eye out for your stops, as they may be hit this week, assuming global markets burst out of the starting gate in 2009.

Your short position in the CurrencyShares British Pound Sterling Trust (FXB) continues to perform strongly as the British currency hit a six and one-half year low against the U.S. dollar last week. With the British pound at virtual parity with the euro, look for weakness in the British currency to continue.

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Your short position in the iShares MSCI United Kingdom Index (EWU) moved into negative territory on the back of the strong rally in the markets on Friday.

The PowerShares DB Commodity Double Short ETN (DEE) dropped on Friday after oil prices stabilized around the $47.50 level. Assuming the improvement in global sentiment is sustainable, we may look to exit this position even before we hit our stops. Otherwise, expect this position to zig when global stock markets zag.

Millicom International Cellular S.A. (MICC), the “Indiana Jones” of the cell phone industry, got off to a strong start, soaring 11.77% since you bought it two weeks ago. This is a highly volatile play that will do well when market sentiment is positive. It soared 7.21% on Friday alone. In its Dec. 29 edition, Barron’s wrote a bullish piece on Millicom, predicting shares could rise more than 25% once investors return to emerging markets.

P.S. Markets and investors’ portfolios have taken a beating during the last few months. With a new president, a global economic downturn, U.S. recession, and $700 billion government bailout, investors are left wondering — is the worst behind us or is the other shoe about to drop? What do I do now? Making profitable investment decisions during these unprecedented times can be difficult if you do it alone. Attend the four most important days of the year in 2009, February 4-7, at the Gaylord Palms Resort and learn how the experts are finding profitable opportunities during the market crisis and how to position your portfolio for safety and growth. To register FREE, call 800/970-4355 and mention priority code 012653 or register online!

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