The second group consists of investors who believe they can outsmart the market. They’ve stayed on the sidelines, planning to buy in and make their fortunes when the markets break down a second time. But they may never get their chance.

Both strategies are flawed. And both ignore the single strategy that investors need to employ to profit in the later stages of a recovery rally.

The first group of investors – the indexers – have a unique problem. Broad-based investments such as indices are really only favored in the early stages of any recovery rally, when there’s plenty of easy money to be made.

These investors either don’t know – or choose to ignore – the reality that long rallies tend to change character: Broad-based choices are super when the rising tide is lifting all boats early in the game. But then the game itself changes.

Early on, index investors reap the lion’s share of the market-rally profits. But as rallies mature and capital continues to flow, successful investing becomes more of a stock-picker’s game. This means that specific stocks – not the indices – become vastly higher probability bets.

There are many reasons why this shift occurs, but it really comes down to two key factors: Where the money is going, and where the money is flowing.

This means there’s plenty of fuel to keep the rally alive both here and abroad, and we’re not alone in our opinion.

Beware of the “Golden Period”

Jack Ablin, who helps oversee $60 billion as chief investment officer for Harris Private Bank (NYSE: BMO), says there is still  “an enormous stockpile of liquidity on the sidelines [and] the reinvestment of [that] cash could help fuel the market.”

Unfortunately, this is well-known to investors, which actually makes it a problem. As hedge-fund manager Kyle Bass noted: “We are today in the midst of what economists often refer to as the ‘Golden’ period, where everything feels good and the long-term effects of deficit spending and money printing have not yet been realized.”

This is something I’ve talked about time and again during investor presentations all around the world. People who are already numb from having been pummeled on the way down, have once again become intoxicated with the rally over the 12 – 18 months that such advances typically last. They see a chance to recoup all their losses and be made whole. This makes them more prone to poor timing decisions, or poor investments choices.

Another problem with long rallies like the one we’re experiencing now is that you have be “in” from the get-go or you won’t “go” at all.  Today’s algorithmic trading simply doesn’t allow for the kinds of market pullbacks and corrections we used to see as recently as 10 years ago. I know – I’ve written several of these trading programs. Today, if you’re not in when the money starts moving, you might as well hang it up.

At the same time, you just can’t sit and wait until things get better, either. If you do, you are likely to miss most of the gains.

And don’t bother trying to “time” the market. That’s a recipe for disaster, as reflected by numerous Dalbar studies. The Dalbar data repeatedly demonstrates that investors who try to time the markets not only fail miserably in the near term, over a period of years they tend to fall dramatically behind the market averages.

How much behind? Try 40%-60%, depending on what data period is examined.

Winning Markets – Big and Small

That brings me back to today’s key point. In the early stages of a rally, it’s best to invest using broad, sweeping choices like index funds or exchange-traded funds (ETFs), which are tied to the major indices. Believe it or not, picking the “right” stocks is essentially irrelevant. Sure you always want to have some zoomers in your portfolio, but when the rally really begins, it’s far more important to have broad-based stock-market exposure. It’s a shotgun approach. And it works.

Over the past 118 years, there have been 19 bear-market events in the Dow Jones Industrial Average. The average bear-market drop was 37%. The rally into the next year generated an average gain of 40% from the market bottom – with 70% of the gains coming within the first half of the rally’s duration.

That’s why, for example, I’ve repeatedly told Money Morning readers, as well as subscribers to our affiliated publications, to employ such broad choices as the Vanguard Wellington (Nasdaq: VWELX) or the SPDR S&P 500 ETF (NYSE: SPY).

Today, with the Standard & Poor’s 500 Index having zoomed 57% from its March 9 low, the rebound is 1.5 times bigger than the typical post-recessionary rally.

That means the best choices are now the companies that are backed by trillions of dollars in stimulus spending and that operate in growth markets that support real earnings, real cash flow and real purchasing power.

That makes a lot of sense if you think about it. Fully 78% of the world’s total economic activity now takes place outside U .S. borders, which means that if you really want to “follow the money,” you’ve got to look in areas that you might traditionally have considered as “off limits.” In fact, you may find that you are looking at companies whose names you can’t easily pronounce. But many of those companies not only have double- or even triple-digit growth, they are still viewed as compelling values – because of the torrid growth rates of the markets they sell to.

Take Iceland. After its financial travails, the country once again has positive gross domestic product (GDP) growth. It’s unemployment rate of 7.7% is not only dropping, it’s now well below the U.S. jobless rate of 9.8%.

Iceland was the first nation to have its currency destroyed and its finances and political government replaced.  It embraced its pain, and focused on doing what was necessary to fix its issues. Now its exports are booming, and its outlook is much better than it was just a few months ago.

Iceland has turned into an example of growth following a situation that most people thought was unfixable. From September 2008 to August 2009 – a period in which most economies were shrinking –the Icelandic economy actually expanded 2.4%. For global investors, economic growth – in the face of some of the toughest economic issues in generations – is the Holy Grail in surviving an economic crisis.

Tourism is flourishing in Iceland, as international citizens flock to that country’s shores to enjoy having a strong currency to spend.

Icelandic vocalist Bjork, 32, a former fashion model wearing silver snakeskin leggings, black boots and blond ponytail, recently told a journalist that “business is growing.” Thanks to the utsala – “SALE” – signs that were everywhere, “tourists are buying a lot these days, and even Icelanders are buying more at home.’

Granted, shopping for designer duds in Iceland with a snake-skinned model may not be your notion of a conservative-economic recovery play, but don’t miss the real point here: What Bjork was shrewdly observing was that consumers in her part of the world are no longer panicking. They’re back from the brink of almost-total collapse and have now come to terms with their nation’s economic recovery.
This demonstrates just why investors need to be looking at markets where there is real growth – from the smallest economies like Iceland, to some of the largest – such as China.

Speaking of which, with a population of 1.3 billion, a personal savings rate of 35%, and a government that isn’t suffering from a fiscal hangover, it’s no wonder the world’s leading companies are beating a path to the Red Dragon’s doorstep.

In China, the government’s focus is growth, and banks are looking for projects to invest in.  Those in positions of power and authority understand the need for balancing savings, growth and long-term investments. China’s stimulus plan focuses on infrastructure development, which will generate long-term growth, while the United States had had to use its balance sheet to prop up “zombie banks” – just to keep things from getting worse than they already are.

If this sounds a bit complex, the reality is that it’s actually quite basic. Limiting yourself to index investments at this stage of the market cycle is not your best bet. We’re now at the stage where the world’s stock markets have already delivered the broad, indiscriminate gains that benefit index-investors to more specific opportunities that require more-careful analysis and some specialization. Follow that game plan and you’ll be a long-term winner.

Source: The Two Investing Mistakes to Avoid at all Costs

In my column last week, I showed you some of the spectacular moves that the four most actively traded commodities (oil, natural gas, gold and silver) have made over the past couple of years.

And when you see the wide trading ranges, it also gives you an idea of just how lucrative they can be.

But you don’t need to be an expert to take advantage. You just need to know how to play them intelligently, using strategies that minimize your risk and maximize your profit potential.

Easier said than done, right? Nope. That’s what I’m here for. And today, I’m going to show you how to add commodities to your portfolio in a much easier way than through futures or futures options, and a much better way than by just buying commodity stocks outright.

Two Reasons Why You Should Use A Put Option Strategy

Perhaps the best way to play commodities is through the options market.

But if you think “commodities and options” in the same sentence sounds scary, think again! Let me explain to you how you can do so, using one of my favorite strategies when you want to take a bullish stance.

It’s called “put-option selling.”

Let’s run through the basics first…

In the options market, a buyer of put options has a bearish stance on the underlying asset (be it the overall market, or stock). Alternatively, a seller of put options is adopting a neutral or bullish stance on the underlying asset.

And the flexibility of the options market allows you to sell options as an opening transaction instead of having to buy them.

In this case, we’re the put-option sellers – a technique that has a superb double benefit.

• You receive income upfront – yours to keep, no matter what happens with the rest of the trade.
• You have a chance to buy the underlying asset at the price you want – and at a large discount to the current price.

Here’s how it works…

Create Your Own “Discount Store”

Whenever you sell an option contract (either a call or put option), the option buyer pays you for it. This money is yours to keep and it gets immediately placed into your trading account.

When you sell a put option contract in particular, not only do you get the immediate cash payment, but you are also giving yourself the chance to buy the underlying asset at the (strike) price you select.

In short, someone is paying you cash so that you can buy the asset at the price you want. How great is that?

Let’s run through a hypothetical example – using the commodities market – to show how put-option selling is as simple as it seems…

Say you’re bullish on a gold stock, but the price has run up too much for your liking. You want to wait for a pullback to the 200-day moving average area before you buy.

Now that commodities exchange traded funds are an extremely popular and easy way to trade commodities, you decide that you’re going to use the SPDR Gold Shares ETF (NYSE: GLD). Here’s how…

How to Buy Gold At the Price You Want

GLD tracks the price movement of physical gold and is roughly one-tenth the size of the front-month gold futures contract.

And because it’s an ETF, it trades just like a stock, so you can buy and sell it through a regular stock brokerage account.

However, with it currently trading around $97, you want to wait for a pullback to the $91 area before buying, as that’s the price at which you feel comfortable owning the shares.

So what’s the best way to take advantage? Regular investors may put in a stock buy order at $91 and hope GLD comes down to that level. But if it doesn’t, you’ve wasted your time.

Here’s where the put-selling strategy comes into play.

• Instead of placing a buy order, you could opt to sell a GLD December 2009 $91 strike put option contract (GLD-XM) for $1.40 per contract.
• What does this do for us? Well, for every put option contract you sell, the option buyer will immediately pay you $140 (because there are 100 shares in each options contract – $1.40 multiplied by 100 = $140).
• If you sell 10 of these put option contracts, you’ll receive $1,400 into your trading account.

That’s right… instant cash just for placing a trade. So what’s the catch? Only that you’re obligating yourself to buy those GLD shares at $91 – which is the price you want!

However, you must ensure that you only sell as many contracts as corresponds to the number of shares you want to buy. For example, if you sell just one contract, you’re obligated to buy 100 shares of GLD for $91 by options expiration. And if you sell 10 contracts, you’d be on the hook for 1,000 shares at that $91 price.

Get Proactive Through Put Option Selling & Get Cash

So instead of just sitting and waiting to see if GLD gets back down to $91 before you buy it, at least when you sell put option contracts, you pocket $1,400 in cash (on 10 contracts) while you wait.

It’s a win-win situation: not only do you get paid money while you wait, you still gain the opportunity to buy GLD shares at the price you want ($91) if it trades back down there by options expiration.

Speaking of options expiration, let’s cover that scenario…

Your Two Scenarios At Options Expiration

Only two scenarios will occur when the December options expiration rolls around…

• If GLD is still trading above your strike price of $91, then the put options will expire worthless and you just keep the $1400 free and clear. The trade is now over.
• If GLD is trading below your strike price of $91, then you’ll be “assigned” the shares on your put options and will become a regular shareholder of GLD at $91 per share. At this point, you’ll have to pay cash in full for the shares. But remember, you get to buy GLD at your chosen price.

A few points to remember:

• You’re selling the put option contract as the opening transaction, not buying it.
• You can buy the option back any time you wish. You don’t need to wait for option expiration to take action.
• You must be approved to trade option contracts through your stockbroker. The broker will also require you to keep a portion of the money it would cost for the shares in your account during the trade (a “margin requirement”) – but not the full amount.
• If you’re assigned the shares, you simply take the same risk management actions you would for any other bullish stock position you own.

The Bottom Line on Selling Puts

If you’re bullish on a stock, but find the price is too high, why just hang around and wait for it to decline? You can earn some cash while you wait through the put-selling strategy.

If the stock ends up below your strike price (the price you want to buy the shares) at option expiration, then you succeeded in your quest. You’ll be able to buy the shares at your comfort level, while still retaining the cash paid to you on day one of the transaction. A no-brainer in my book.

Good investing,

Lee Lowell

Source: How to Buy Gold… At the Price You Want & Get Paid for It

It’s a world shrouded in deep myths and folklore that include stories of people losing their homes, or having 5,000 bushels of soybeans dumped on their front lawn.

I’m talking about the commodities world, of course.

But despite these tall tales, commodities aren’t necessarily dangerous investments. Not if you know what you’re doing and take adequate precautions. Rather, the “secret society” stuff comes from the belief that the sector is a murky one that many investors simply don’t understand. Just the mere sound of “commodity futures and futures options contracts” was enough to send people running for cover…

However, nothing could be further from the truth when dealing with commodities. And over the past few years, we’ve seen great changes in the financial world that have opened the doors to this “secret society.”

Step Out of Your Comfort Zone… Don’t Be Afraid of Futures & Futures Options

I’ll tell you what I’ve told my friends and acquaintances over the years: Don’t be scared of commodity futures and futures options, they’re essentially little different than stock and stock options. If you know how to trade stocks and stock options, then there’s no difference from futures and futures options.

For example, if you can buy and sell IBM (NYSE: IBM) shares and IBM options, then why can’t you buy and sell sugar futures and sugar options? There is no difference. As long as you have an idea of where an investment (be it IBM or sugar) might move to and its underlying fundamentals, then what is there to be scared about?

Here’s the problem as I see it (based on my 18 years of experience in the commodities sector): Most people just don’t know enough about the underlying fundamentals of commodities – how/why soybeans, cocoa, cotton, or live cattle trade in a certain way. The majority of people know stocks and that’s that. They don’t like change and are fearful to step out of their comfort zone.

But all commodities that are available to trade on various U.S. exchanges are highly regulated. They have strict rules, which are efficient and assure the integrity and safety of your capital.

So if you’re looking to add some great potential gains to your portfolio, then consider what commodities can do for you…

Four Commodities… Four Explosive Moves

Want some examples of how explosive the world of commodities can be? Just look at these moves for oil, natural gas, gold and silver over the past year…

How would you have liked to hop aboard some of those moves?

Oil: When it started rising in 2007 and topped in 2008, it encompassed a staggering $90,000 move if you’d held just one contract. And the freefall that ended last March brought in an unheard of $110,000 for anyone being bearish.

If you’d held 10 contracts during those moves, you could have seen gains of over $1 million! And that’s just one direction. Double it if you went both ways.

Natural Gas: The move up in the summer of 2007 to the top in 2008 encompassed an $85,000 move, while the drop back down to the lows hit just two weeks ago and saw an even larger haul of $110,000. And this was for holding just one measly little contract. Imagine if you had 100 contracts.

Gold: From the gold chart below, you can see the trend higher from 2002. But even if you got onboard as late as 2006, the move could still have netted you $45,000.

Silver: A bullish position taken in 2006 would have scored $60,000 on just one contract. And if you’d hopped on the bear train near the highs in the spring of 2008, you could have pocketed another $65,000 just six months later.

This is some serious money folks.

And the great thing about commodities is that it’s normal for them to cycle from highs to lows and then back again. This gives you opportunities to profit on the way up and the way down. Moreover, it’s in contrast to the stock market, where most moves are biased to the upside.

Now, if you want to profit today…

Three Reasons Why You Should Trade These Four ETFs

Due to the changes that have taken place in the commodities world, regular investors have a chance to take part in the sector without leaving the comfort of a stockbroker.

We’re talking about commodity-related exchange-traded-funds (ETFs), which mimic the moves of the underlying asset. So you can use them to play some of the most popular and active commodity markets.

For example, if you’d like to go for oil, natural gas, gold, and silver, consider these ETFs:

• Oil: United States Oil Fund (NYSE: USO)
• Natural Gas: United States Natural Gas Fund (NYSE: UNG)
• Gold: SPDR Gold Shares (NYSE: GLD)
• Silver: iShares Silver Trust (NYSE: SLV)

If you want to gain exposure to the often lucrative commodities world, here’s why you should trade these ETFs…

1. Simple: ETFs trade like stocks, so you can buy and sell them as you would with shares of any other company from a regular stock brokerage account. So you don’t even need to get involved with commodity brokers, futures, or futures options contracts.
2. Options: The ETFs also have options available, which offers you more leverage and can reduce your risk.
3. Liquidity: Because all four of these ETFs are the largest ones available for their respective commodities, there is enough volume to be able to get in and out quickly and safely.

Next time, I’ll show you one of my favorite ways to use an options strategy to execute a bullish commodity trade. But in the meantime, check out those ETFs above.

Good trading,

Lee Lowell

Source: Four Easy Ways to Trade the World’s Top Commodities

With the small-cap research tool I’m about to show you, you’re well on your way to seeing how the market moves ahead of the herd.

Here’s everything you need to know…

A while back, I wrote to you about our Small-Cap Recovery Index. The index is composed of fundamental data from 100 small-cap stocks, as well as economic factors like unemployment and personal savings rate.

It’s designed to give us a glimpse at signs of recovery for the stock market.

While the market has rebounded in a big way since it bottomed in March, many investors are concerned that stock prices are already getting out of whack. But we’ve designed the Small-Cap Recovery Index to go beyond share prices.

Unlike major indexes — like the S&P 500 or small-cap Russell 2000 — ours isn’t a typical stock index. While hundreds of stocks are included in the index, stock prices actually have a relatively small effect on its daily movement. The majority of the index is based on the latest available fundamental performance.

But while gauging how “healthy” the market is can be very valuable, the Small-Cap Recovery Index provides us with considerably more data. In fact, as we continue to watch the index, we hope to use the information it provides to not only peg where the broad market is headed, but which industries hold the keys to growth.

We can accomplish this thanks to the predictive power of small-cap stocks. You see, historically, penny stocks lead the stock market out of recession. “From 1943–2007, according to one analyst, small companies outperformed large companies by more than 50 percentage points in the three years following a recession, including the one following 2001,” explained Ken Kurson in an article published on Esquire.com a few months back.

By monitoring how small caps perform fundamentally and technically, we can essentially predict where more major indexes — the S&P 500, for instance — are headed.

Now, 12 weeks into collecting and analyzing our data, we’ve already caught some indications that the index is doing its job. More on that in a bit…

A Look at the Small-Cap Market

The chart above shows the Small-Cap Recovery Index for the last 12 weeks. The index, which is calculated daily after the market close, is based on a 100 scale — its current value of 107.4 means that the Small-Cap Recovery Index has gained 7.4% since we began tracking it.

While a high number for the S&P 500, which just measures share prices, could suggest that stocks are overvalued, when it comes to the Small-Cap Recovery Index, bigger is definitely better. That’s because a higher number means that the small caps that make up our index are performing well for investors and — more importantly in this environment — performing well from a financial and economic perspective.

In the past couple of months, the index has seen its value increase materially, which is a very good thing. But while the SCRI’s value gives us a good idea of how small caps are performing, it doesn’t do a very good job of actually predicting where the markets will move next. That’s where the oscillator comes in…

The Small-Cap Recovery Index Oscillator

The Small-Cap Recovery Index Oscillator, which is based on the index itself, measures the divergence between the performance of the Small-Cap Recovery Index and the S&P 500.

While that sounds pretty complicated, it’s actually a very simple concept. The rationale is that the S&P 500, which is a pretty good indicator of the market itself, shouldn’t move significantly more or less than our Small-Cap Recovery Index. And because fundamental data that move ahead of the market — like sales and unemployment — are factored into our index, our index should set the direction of market movements first.

When things are stable, the oscillator should sit around 0 — meaning that there isn’t a major difference between our index and the S&P. But when it moves very high or low, it sends a signal that the S&P, which doesn’t have fundamental economic data to keep it grounded, should move back in a direction to push the oscillator back down.

We’ve actually come up with a math-based methodology to place bets on the market using the data that the oscillator spits out.

And while the specifics are too rigorous to detail here, we’ve determined that if you had used those rules to invest in the ProShares Ultra S&P 500 ETF (NYSEArca: SSO) or the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), depending on the buy or sell signal, you would have made 36.03% in just six weeks.

That’s an annualized gain of 312.26%!

And right now, with the oscillator (the blue line in the graph below) high, it suggests that the market’s buying frenzy is coming to an end. That’s not to say that the oscillator can’t be wrong — we’re still in the early stages of collecting data and testing its accuracy.

So what’s the SCRI Oscillator telling us right now?

While it’s good that the SCRI has increased in the last 12 weeks, a quick look at the oscillator shows us that the S&P 500 has increased much more quickly — that’s actually a bad thing for the market because it means that investors have overvalued the S&P against the fundamentals of the market.

And already, we’re seeing the S&P 500 start to decline to fall back in line with the Small-Cap Recovery Index. Unless big stocks improve their fundamentals enough to match the small-caps, it’s time to expect a tumble in the S&P back to SCRI levels. We still have considerable data to collect before we begin to use SCRI data in our stock picking methodology, but right now, it’s clear that the index could soon become a very powerful tool in our investment arsenal.

Cheers,
Jonas Elmerraji

Source: The Only Tool You Need to Predict the Market’s Moves

Deutsche Bank announced late yesterday that they were pulling the plug on the PowerShares DB Crude Oil Double Long ETN (better known as DXO). Most ETFs and ETNs die out because they can’t attract enough investors. DXO seems to have suffered the opposite fate.

In the new clampdown on commodity speculators, it’s no huge surprise to see the world’s most popular double-long, leveraged ETN fold suddenly. Deutsche Bank didn’t specifically claim that the Commodity Futures Trading Commission put the kibosh on the DXO, but their press release did cite a “regulatory event” as the principal reason for the closure.

Set to close on Sept. 9, DXO is now hemorrhaging. We’re not sure which is worse for share prices: its imminent closure or that it’s double leveraged a commodity that’s currently plummeting.

Deutsche Bank has other popular commodity trading vehicles, like DBA (agriculture) and DBC (general commodities), that could suffer a similar fate. Both of those funds rely on a position limit exemption, which the CFTC revoked last month. Caveat emptor.

“Anytime the government intervenes like this in the financial markets, they destroy efficiency,” says Resource Trader Alert’s Alan Knuckman. “The action by the CFTC to limit position sizes will only make the problem worse by decreasing liquidity. Markets need more speculators — not less — to lessen the impact by any one entity. For example, the elimination of short selling in the financial stocks in the fall of 2008 caused more damage by dragging out the inevitable for companies that made disastrously poor decisions.

“The CFTC will force trading to move to the over the counter market, which lacks transparency, or to foreign exchanges. Volume and open interest could decline here in the United States and make transacting business more difficult and costly in the future. The present tight bid/ask spreads ensure smooth market entries and exits for all. Without the ability to execute a solid trading plan efficiently, the risks increase for all participants.

“With the current and effective monitoring rules, we know exactly who and how players are positioned. Under the proposed political pandering, that data will disappear from the public eye.”

Source: ETF Reckoning Day?

Was it worth it? It has been nearly two months since ProShares released its 130/30 ETF (NYSE:CSM) based on the Credit Suisse index with the same name. Has the popular strategy been able to beat the overall market as so many investors had hoped for? Or is it yet another flimsy hype-driven ETF?

When the strategy first became popular, it was the talk of many investing circles. It was so popular, the ETF world could not resist creating a fund of its own. Now investors want to know if the increased leverage and expense of long-short strategy is worth it.

For a glimpse of the recent action, here’s a chart:

As you can see, the ETF holds up to its name and does indeed outpace the market. If you had bought shares at the inception and would sell them now, you would be ahead of the S&P 500. But not by much.

Any time we discuss ETFs or mutual funds, the first thing question you need to ask is, “What is this thing going to cost me?”

After all, it takes lots of people buying and selling stocks and pushing paper to run an ETF. And until Washington gets its way, none of them do it for free.

Too much for too little

Currently, the 130/30 ETF posts an expense ratio of 0.95%, not super expensive in the world of funds, but not cheap, either. The fee is an instant handicap for a fund that is fighting to beat a tough benchmark like the S&P 500.

Really, this ETF is the lazy man’s way of taking advantage of an otherwise sound strategy. If you cannot afford the time or don’t have the investment portfolio of the size needed for a high-quality 130/30 portfolio, you are better off buying a simple, cheaper market-based fund.

If, on the other hand, you can handle the rigorous research and trading involved in the strategy, chances are you will be able to outpace the benchmark by wider margins on your own.

To really outshine the markets, your investments need to be on the tails of the market curve. An index-based ETF like this one does not offer the leverage most 130/30 investors are truly after.

Once again, the ProShares 130/30 ETF is a marketer’s dream come true, but offers little that investors could not find elsewhere at a much better price.

Source: 130/30 ETFs: All Hype and No Reward?

Source: Investment News Briefs Thursday, August 13, 2009

In the roaring bull market of the 90s – and since – his book was required reading. Millions of investors were strongly influenced by his research.

In the process, Siegel became a celebrity, appearing regularly on network and cable investment shows. He is also now an advisor to WisdomTree Investments, a sponsor of exchange-traded funds.

But while history once buttressed Siegel’s grand conclusions, current events haven’t been so kind…

More specifically, as of June 30, U.S. stocks have underperformed long-term Treasury bonds over the past five, 10, 15, 20 and 25 years.

Zweig Argues Against Siegel’s Methodology

To add insult to injury, Jason Zweig recently argued in The Wall Street Journal that Jeremy Siegel’s methodology was flawed from the beginning. It turns out that Siegel’s chosen stock market indexes and dividend calculations from the 1800s were not representative of the period, skewing returns upward.

“Another emperor of the late bull market,” Zweig concludes, “has turned out to have no clothes.”

But what’s the real story here: Are stocks not the best long-term vehicle? Are bonds – or something else – better? Is Siegel just plain wrong?

The answer to each of these questions, it seems, is yes and no.

Bonds have outperformed stocks over the last 25 years in part because yields at the starting point – during the hyper-inflationary early 80s – were sky high. From current low levels, outsized returns like these are impossible.

(That doesn’t mean, of course, that equity returns couldn’t still lag them.)

And we can quibble about how equity returns were calculated in the 1800s, but let’s be serious. What difference does it make exactly what “stocks” returned when investors were swapping certificates – along with fox and beaver pelts – under a shade tree beside a dirt road.

That scenario bears little resemblance to modern financial markets.

The Real Reason To Invest In Stocks

No, the real reason to invest in stocks is because it allows the average investor to hold a liquid,diversified portfolio of profitable businesses, something that would otherwise be cost prohibitive for most.

Granted, the economy is tough right now. But businesses can always respond to adverse circumstances.

• During recessions, a business can cut costs, lay off unnecessary personnel and refinance debt at lower levels. During inflationary times, businesses can pass on higher costs to customers. Even the burden of higher taxes and greater regulation – both underway – are ultimately passed along to consumers.

In short, we will always have economic needs. Yet it is not government that provides us with food, clothing, shelter, health care and other essential goods and services. It is business.

• Businesses exist to meet our needs and, in the process, maximize profits for shareholders.
• Business ownership has always been the most reliable route to financial independence. And owning a diversified portfolio of fine companies should continue build and safeguard capital.

Just don’t make the mistake of believing that anything is guaranteed or that the future will look just like the past.

As the late, great Peter Bernstein said in the Preface to the first edition of “Stock for the Long Run“:

“When all is said and done, the future will always remain hidden from us. The past, no matter how instructive, is always the past… Professor Siegel so rightly warns readers of this when he writes that ‘the returns derived from the past are not hard constants, like the speed of light or gravitation force, waiting to be discovered in the natural world. Historical values must be tempered with an appreciation of how investors, attempting to take advantage of the returns from the past, may alter those very returns in the future.’ Although the advice set forth in this book very likely will yield positive results for investors, the odds are higher that uncertainty will forever be your inseparable companion.”

Source: Dr. Jeremy Siegel: Are Stocks Still The Best Long-Term Investment Vehicle?

Tuesday morning on CNBC’s Squawk on the Street, anchors Mark Haines and Erin Burnett featured commentary from Phil Roth, Chief Technical Analyst at Miller Tabak. Roth explained that investors shouldn’t be fooled by the recent rally we’ve seen since the market hit its March 9 low of 666.79 – until stocks test their current levels, we could be seeing a bear market rally that could easily give back some of those gains.

CNBC’s Mark Haines was outraged. “The market’s moved more than 20% higher off the lows… 20% or more is a bull market. The benefit of the doubt has to go to the bull market,” exclaimed a frustrated Haines after Roth discounted the anchor’s opinion.

Who’s right?

Forget about what’s happening on TV – to make an informed opinion, we need to check out a chart…

Above is a look at the S&P 500 from last summer (before the market crumbled beneath us in October) to present. What’s initially clear from the S&P’s price action is the fact that between market bottom on March 9 and May 8 the movement was almost exclusively up.

That’s no surprise given just how oversold the market was in March.

Ever since then, the market has traded flat, bouncing around in a channel, and making investors sitting on gains from the last few months very nervous.

What should make investors more nervous is the potential for a bearish “head and shoulders” pattern forming on the S&P right now…

If the S&P decisively breaks through the shoulder level above, we could easily see a drop to around 852 before it encounters any kind of support. Luckily, the downside risk is relatively shallow right now, but that could change alongside market conditions.

This week, we’ve seen a slew of negative reports that seem to indicate the economy isn’t quite as strong as many investors thought – jobs numbers were dismal on Monday alongside slipping oil prices for starters. As earnings season kicks off, good income numbers could be the only thing that keeps us from tumbling further… more on that in a minute…

Taking on Multiple Timeframes

One of the strongest technical confirmations of where the market’s going can be found by looking at multiple timeframes. While things look nasty on the 12-month chart we looked at above, how are things positioned shorter-term?

Over the course of the last two months, the bulls have clearly been losing ground through two increasingly drastic downward movements. That seems to suggest that our medium-term downtrend is holding in “bear mode”.

While the possibility that we’ll experience a new market bottom is doubtful at present, the possibility that the stock market will continue to fall over the course of the next month or two is quite likely.

Making Money with ETFs

Even though things look unappealing for most companies’ share prices right now, there is a glimmer of hope for investors who want the rally to continue.

It’s earnings season, and strong numbers from a few of Wall Street’s darlings could do a lot to change investors’ fortunes. Right now, the economy’s fundamentals are weak, and earnings expectations are muted. If big names on Wall Street can beat analyst expectations, it’s quite likely that the market can put the brakes to its slide.

That said, there are plays to be made regardless of where the market’s going – and ETFs provide one of the best ways to pull down gains right now.

ETFs – or Exchange Traded Funds – are essentially baskets of securities that trade on major exchanges. Think of them as mutual funds that trade like stocks. But unlike mutual funds, ETFs can get you a part in almost any market imaginable… Even commodities like gold and oil, and emerging market stocks.

I’ll let you in on some interesting ETF strategies in the coming weeks. Until then, I’ll continue to keep you updated on what’s going on in this wild market.

Cheers,

Jonas Elmerraji

Source: Is the Market Bound for Another Bottom?

Traders are awaiting fresh direction from the foreign exchange markets after a meeting of G8 leaders later this week.

Spot gold was bid at $922.65 an ounce at 1544 GMT, against $924.00 an ounce late in New York on Monday, having earlier touched a high of $931.55.

U.S. gold futures for August delivery on the COMEX division of the New York Mercantile Exchange eased $1.20 to $923.10 an ounce.

With physical demand sluggish despite a price dip, the gold market is largely being driven by currency moves, traders said.

The precious metal edged lower on Tuesday as the dollar  recovered earlier losses against a basket of currencies. The euro, which was earlier lifted by better-than-expected German factory orders, retreated to turn lower.

“The pick-up in the dollar has put some pressure on gold values today,” said David Wilson, metals analyst at Societe Generale. “All commodities are a little weaker, with oil off as well (and) base metals prices still slipping too.”

“Investment demand for gold has stalled, and that has been the key support for gold for much of the first half,” he added.

A stronger dollar reduces interest in gold as a currency hedge, and makes the metal more expensive for holders of other currencies.

The market is looking for any comments on the dollar’s role as the global reserve currency at the Group of Eight leaders’ meeting starting on Wednesday, which could impact on the foreign exchange markets and consequently on gold.

“We have the G8 this week where there is potential for some discussion about the reserve currency… which could have an impact on the currency markets and indirectly on the (gold) price,” said Simon Weeks, director of precious metals at the Bank of Nova Scotia.

WEAKER

Technically, the picture is looking weaker, with gold’s trade down through the 100-day moving average opening up the potential for a move down to $915, Weeks added.

Investment demand remained relatively soft, with holdings of the largest gold-backed exchange-traded fund, the SPDR Gold Trust , falling 0.36 tonnes on Monday.

Switzerland’s Zurich Cantonal Bank, however, reported modest inflows into its gold and silver ETFs last week.

Physical demand for bullion bars has improved slightly in the last week or so, dealers say, but is far from its peak.

Among other precious metals, silver was at $13.13 an ounce against $13.24. Platinum was at $1,131.50 an ounce against $1,143, while palladium stood at $238.50 against $239.

Both platinum group metals have suffered from the downturn in the car industry, their main consumer. Any sign of a recovery in the sector could trigger a turnaround, analysts said.

LONDON, July 7 (Reuters)