But here’s the story in a nutshell. Li Lianzhong, a senior economist in the ruling Chinese Communist Party, directly attacked the dollar yesterday. Li’s message is simple: China should buy more gold because the dollar is poised for a fall. Li also said that China should use more of its $1.95 trillion in foreign reserves to buy energy resource assets.

Speaking at a forex and gold forum, Li asked the very valid question, “Should we buy gold or U.S. Treasurys? The U.S. is printing dollars on a massive scale, and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So gold should be a better choice.”

There is no doubt in our minds that China – the largest holder US Treasurys with $763.5 billion worth of bonds at the end of April – is maneuvering to reduce its exposure to the buck.

China has already said it will buy up to $50 billion worth of bonds denominated in Special Drawing Rights. These are essentially potential claims on freely usable currencies issued by the International Monetary Fund.

And on April 24, China revealed it had increased its holdings of gold to 1,054 tons from 600 tons since 2003.

Charles Delvalle offers another way to protect yourself from a dropping buck. Charles reckons that as the dollar has lost value the stock market has risen. In a recent e-mail to the crew at Notes he said…

“As long as the dollar isn’t dropping catastrophically then a falling dollar may actually be good for the stock market. Since March 9th, while the stock market has increased over 25%, the dollar has lost 10% of its value. What this shows is that as long as the dollar isn’t dropping catastrophically then a falling dollar may actually be good for the stock market. It means that the velocity of money is increasing. In other words, cash is moving out of bank accounts and into the markets.

“So one way to play a falling dollar is by going long the market. My suggestion is to buy into the strongest index right now, the Nasdaq. You can do that by buying shares of the Powershares Exchange Traded Fund (QQQQ) which tracks the Nasdaq.

“Another way to play a weaker dollar is by betting that the currency itself will fall. You can now do that easily thanks to ETF’s. One ETF which increases in value as the dollar drops is the PowerShares DB US Dollar Index Bearish (UDN).

A few weeks ago in the State of the Market special report, I cautioned the bears to look out for a sharp rally. The market was just looking for an excuse to rally. Enter Citigroup (NYSE:C) (which I suggested was worth taking a flier on in last week’s article) with word that they made money in the first two months of the year.

Here is what I would suggest. First, if you are looking at the short-term, I would look for the market to continue to rally over the next few weeks. Getting the indices out of the historic oversold level we reached a few weeks ago. Second, if I am looking at the long-term, I might be wading in at this point, but I would not be diving in headfirst will all my money allocated to stocks.

I know many investment professionals say you shouldn’t try to time the market, but I have to disagree with them. You don’t have to time the tops and the bottoms, but you certainly should be adjusting your asset allocation based on whether or not we are in a bear market or a bull market.

How do you know which one we are in? There are hundreds of answers for that, but a simple one that I have been using and testing is a crossover of the 6-month and 12-month moving averages for the S&P 500.

Look at the chart below. Over the last 20 years, had you loaded up on stocks when the 6-month crossed above the 12-month, you would have been heavily allocated to stocks from late 1994 until late 2000, heavily allocated to bonds from 2000 until early 2003, back into stocks from 2003 until early 2008, and then back to bonds. Is it perfect? Of course not. It doesn’t get you in at the exact bottom and it doesn’t get you out at the exact top. But it does have you in for the bulk of the move.

How effective would this S&P timing signal have been over the last six years? Well I looked at three portfolio scenarios after the last bullish signal in early 2003 until the end of 2008.

Scenario 1- all money was put into four equity ETFs- the Diamonds (NYSE:DIA) (the Dow), the Spyders (the S&P 500), the QQQQ (the Nasdaq 100, and the IWM (the Russell 2000). There was no timing used in this scenario, it was strictly buy and hold.

Scenario 2- 80% of the money was put into the four equity ETFs in scenario 1 and the remaining 20% was put into three different bond ETFs. This scenario also used a buy-and-hold strategy.

Scenario 3- using the simple timing mechanism mentioned above, 80% of the portfolio was in the four equity ETFs and 20% in the bond ETFs until March 2008. At that time, the funds were reallocated to 30% in the four equity ETFs and 70% went into the three bond ETFs.

So how would you have fared using this strategy? Look at the chart below. Assuming a starting value of $1,000,000, at the end of 2008, your buy and hold strategy for stocks would have produced an overall gain of 14% and the buy and hold strategy with bonds and equities would have gained 19%. The clear winner was the one that used the timing mechanism. This strategy would have produced an overall gain of 52%.

Notice on the chart how Scenario 3 trails the other two ever so slightly for the first four years, loses ground in 2007, but saves you massive pain in 2008.

Getting back to the original theme, as a short-term trader, I would be playing the long side of this market for the next few weeks with an eye on the earnings season that will start in approximately three weeks. As a long-term investor, I would be dipping my toes in the water for now, but I would wait for confirmation of the 6-month moving average crossing back above the 12-month moving average before changing my asset allocation back to mostly equities.

Source: Simple Timing Tool That Will Help You Protect Your Assets

The Dow logged its second best one-day point gain, 889 points, in its even more storied history yesterday:

Percentage wise, at 10.8%, the rally ranks sixth. The S&P and Nasdaq trundled alongside the old lady like puppies.

After finding a new “credit crisis” low on Monday, traders on Wall Street snapped back with vengeance. But it’s not the higher highs we’ll be watching for the rest of the week — but lower lows. During each sell-off since extreme volatility began three weeks ago, we’ve reached all-new lows.

The Japanese market performed in a similar way through the entire decade of the ’90s. It rallied at least 30% higher five times since 1992, before finding new lows again, and again… and again.

Extreme volatility is a good thing if you’ve got the stones for it. “You do know someone who does seem like they know what the hell they’re doing, day to day,” Steve Sarnoff wrote to us after reading yesterday’s 5.

Steve included his gains sheet from Options Hotline, noting that his Intel calls triggered yesterday. Any of his subscribers with filled orders profited about 97% in a single trading day. Yawn… stretch… not as exciting as his 439% gains on QQQQ puts two weeks ago. But still…

On the short side, Dan Amoss told his readers yesterday to pocket 94% gains on their Fleetwood Enterprises short sale. Shorting a financially distressed manufacturer of recreational vehicles… who’d have thought that would be a good play?

If you’re interested in options or shorting stocks, let us remind you both are extremely risky ventures. But we’ve got a couple of ringers to help. Check out Options Hotline and/or Strategic Short Report for ideas. Both are included in your Reserve Membership. Or available a la carte.

Despite yesterday’s monster stock rally, the credit markets are still moving cautiously. The rate at which banks lend to one another (Libor) did decline again today, the 13th day in a row, but only by a little.

The three-month dollar Libor fell just 4 points overnight, to 3.46%. Considering an all-but-certain rate cut from the Federal Reserve today, commercial banks had every excuse to relax lending rates significantly… but guards are still up around the world.

“We are not going to say, ‘Yahoo, this is over!’” explained JPMorgan Chase CEO Jamie Dimon, “and extend credit like we did without fear. If you’re not fearful, you’re crazy.” That coming from the guy who was fearless enough to buy Bear Stearns with little more than a wink from Ben Bernanke over Sunday tea.

The Fed will announce its latest interest rate decision today around 2:15. Anything less than 75 point cut and we suspect a sell-off. 1% or lower, here we come. We’re turning Japanese… we really think so.

After a decade and a half of practically free money, the Bank of Japan is considering its interest rate again, too. It’s already at the 0.5%. How much lower can the Japanese go?

The reversal in the equity market yesterday reverberated in the currency world.

The dollar took a pretty good whack. The dollar index fell two full points from yesterday’s high, now at 85.5. Thus, the euro enjoyed a nice bounce, up 3 cents, to $1.27. The British pound is back up nearly a nickel, to $1.60. And yen traders took profits, bringing the Japanese currency back to 97.

“The eventual cost to the U.S. financial and economic system,” says John Williams, “will be much higher inflation.

“The monetary base has seen an unprecedented surge, reflecting total reserves of depository institutions jumping from an average of $47.1 billion (seasonally adjusted) in the two weeks ended Sept. 10 to $328.6 billion in the period ended Oct. 22.

“Using the St. Louis Fed’s adjusted monetary base (effectively total reserves plus M1 cash in circulation), the year-to-year growth in the latest period was an unprecedented 38%. In the period since 1919, the previous high growth rate was 28% in September 1939, as the U.S. was building up industry for the evolving war in Europe.

“Back in the days when the Federal Reserve targeted money supply growth, the monetary base was the measure it adjusted. The current surge in the base is a direct result of the ongoing, extraordinary actions taken by the Federal Reserve and the U.S. Treasury aimed at preventing a collapse of the U.S. financial system. The higher monetary base growth will result in sharp spikes to domestic money supply growth and will intensify inflationary pressures in the year ahead, irrespective of wild gyrations and sell-offs in oil and of strength in the U.S. dollar, which otherwise should prove very short-lived going forward.”

Meanwhile, the U.S. government is beginning to advertise for new bailout money: “We are making it clear to sovereign wealth funds,” Deputy Secretary of the Treasury Robert Kimmitt said yesterday, while seeking help in the Persian Gulf, “that we are open to investments that are done on a commercial, not political, basis, and that do not raise security concerns.”

Kimmitt hinted he may have found some takers already: “We think that they are continuing to look very closely at opportunities in the United States. We have a number of cases before the Committee on Foreign Investment right now… Every investor that I’ve spoken with here and elsewhere had been in the United States within the past month, looking for opportunities.”

Who would have thought even three months ago — besides your cranky editors of The 5, I mean — that Wall Street would be holding a global garage sale this fall?

Orders for durable goods, surprisingly, jumped in September. According to the Commerce Dept. today, orders for things meant to last more than a few years increased 0.8%, well above the expected fall of 1.2%.

Before you celebrate (we know how durable goods data get you percolating), the actual details weren’t so optimistic. The Commerce Dept. revised August data to show a 5.5% fall in orders, the worst month in almost two years. And all of this month’s improvement came from transportation equipment, a sector so depressed it hardly has any more room to fall.

Since the dollar has pulled back, commodities have pushed forward. Gold continues to inch up this week, and has now struggled back to $760 an ounce.

Oil is creeping back up, too. Crude is up $4 today, on a weaker dollar and the fleeting image of a stronger U.S. economy. A barrel goes for $66.

“Energy development is exploding in Africa,” reports Byron King. Our energy adviser made the long trip to South Africa for a conference on African energy development.

“In the past decade alone, the number of companies actively looking for energy deposits in Africa has soared from under 100 to over 500. By 2018, there may be 800 or so companies exploring for and producing energy in Africa. Expect to see $350 billion spent in Africa by 2020, just on energy development.

“There are over 100 billion barrels of discovered oil reserves in Africa. And there may be as much as another 100 billion barrels left to be found. And even more natural gas, in terms of energy content. Plus, heavy oil. And coal and coalbed methane. Which makes Africa more of an energy development target than Russia, or the even the Arctic — without the weather issues that we find up north in such frozen climes…

“For now, oil prices are down, but investment is still flowing into a lot of energy projects in Africa. Some companies are having trouble with short-term credit, but this is not the biggest issue for the energy industry and its efforts in Africa. When the economic logjam breaks up, among the first things that will happen is that worldwide energy supplies will tighten. And eventually, the world will confront its long-term lack of investment in the energy industries.”

Even though oil has perked up, gas prices are still plummeting. The national average is now at $2.58 a gallon. That’s a level unseen since March 2006. The national average has shaved off a full dollar and change in the last month alone.

The IMF officially bailed out Hungary today. The country is getting a $25 billion loan. That’s the third IMF nation rescue in this crisis, and bigger than the first two — Iceland and Ukraine — combined.

Six percent of U.S. employers have cut 401(k) contributions this year or plan to do so in the coming months. According to a study by human resources firm Watson Wyatt, that number is likely to grow, as many firms surveyed refused to comment, as admitting to a 401(k) slash stinks of fiscal weakness.

Notable companies that have already nixed their 401(k) contributions include Goodyear, Frontier Airlines, commercial real estate firm Cushman & Wakefield, Entercom and rental car agency Dollar Thrifty.

“I, for one — also a Reserve Member — am totally thrilled,” writes a reader, responding to yesterday’s inbox, “that not one word of ‘asset allocation,’ ‘time horizon,’ ‘risk tolerance,’ ‘cost averaging’ or other such drivel and pablum of the financial industry is to be had among the Agora publications. I hope it stays that way. If it’s advice on those subjects he’s looking for, well, it’s even more abundant than the rivers of worthless paper flowing out of the Fed. Just ask for it from almost any investment adviser.

“As Buffett aptly notes, those are all methods for how to be average — and average right now is downright scary. The degree of risk that one assumes is directly proportional to how much one understands the fundamentals of an investment, sees the obvious and acts accordingly. It was largely due to the steady stream of spot-on, if not conventional and frequently unpopular, commentary coming from the crew of Agora doomsayers, who often ran against the mainstream financial media and consistently pointed to the buildup of ugly economic data, that I became convinced to do the obvious.

“Last year, I exited nearly all long positions and loaded up on puts in the financials and in the consumer stocks and indexes and barricaded myself with inverse market positions, with many of these either recommended or inspired by Strategic Short Report and the late Survival Report. And yes, I even did this for my retirement account. I couldn’t be happier with the results.

“While I’m still waiting for gold to have its day, Mr. Bernanke and friends have been very hard at work ensuring my eventual returns there. Had I asset allocated according to my time horizon and risk tolerance (gag…cough…) I would no doubt be enjoying the wonderful returns on bonds and cash, instead.”

The 5: Nice work.

Cheers,

Addison Wiggin
The 5 Min. Forecast

Source: Can the Mega-Rally Hold? The “True Cost” of the Crisis, An “Exploding” Energy Market, and More!

This from the Smart Profits Report:

I believe there are opportunities to buy technology stocks if you have a long-term outlook.

In the current climate, however, the best strategy to use is to buy the shares, then buy a put (known as a “married put”) as a hedge against the stock position.

You can also buy technology sector-specific ETFs, or a market index like the PowerShares QQQ Trust (NASDAQ:QQQQ), which eliminates the risk from a specific company.

As the market indexes eventually find a bottom and rebound, tech company shares — and indeed shares of other companies — will also stabilize over the next 12 months.

However, if a highly influential heavyweight company like General Motors (NYSE:GM), which plunged 33% to its lowest level since 1950 on Thursday, or Morgan Stanley (NYSE:MS), is forced into bankruptcy (despite GM defiantly stating that this won’t happen), there’s a real possibility that we could see a four-digit decline for the Dow Industrials index.

In sum, the longer-term trend is up but the path to stability may hide some sizeable potholes.

That’s why it’s essential you give yourself the best chance to emerge from this mess with as few bruises as possible.

Source: 3 Safe Ways to Invest In Technology… Despite the US Economy and Fuzzy Math

Rick Pendergraft advises investors to do one of two things: “If you are a long-term investor, ignore most of the news unless it affects one of your stocks in particular. If you are a short-term trader, take profits quickly and take losses even quicker.”

Buying an inverse ETF that profits as the market drops is also a sound way to insure against losses…

This from Investor’s Daily Edge:

As choppy as the action has been over the last few weeks, you have to be nimble and adapt to the conditions.

The weather in the Midwest can only change so much, depending upon which season it is.  It isn’t going to snow in July and it isn’t going to be 90 degrees in January either.  The same can be said for the market these days.

So you shouldn’t expect the indices to wipeout all of 2008’s losses in the next few months.  If you look at a monthly chart of the S&P 500, there are two things to take note of.  First, the S&P failed to close above the March 2000 high and has moved lower since last October.  The second item is the crossover of the 10-month and 20-month moving averages and how the long-term trend is clearly to the downside.

The last time these two trend lines had a bearish crossover was in early 2001.  There were bounces that lasted a month or two during the bearish years of 2001-2002, but the 10-month moving average kept things in check except in March ’02.  We have already seen one rally squelched by the 10-month this year (back in May).  We are significantly below the 10-month right now, but the 10-month RSI is reaching oversold levels, so we could see another attempted rally in the near future.

Personally, I am taking a more aggressive approach to closing trades.  As an example, I opened a put trade on the Regional Bank HOLDRs Trust Monday morning and turned around and closed it Tuesday morning for a triple digit gain.  I could have kept the trade open to see if the RKH went lower, but with the volatility we are seeing (especially in the financials) I felt it was prudent to take my gains and run.  By the end of the week, the RKH had bounced back as high as $111 after dropping as low as $102.

If you are a short-term trader, take profits and losses aggressively.  If you are a long-term investor, ignore most of the news unless it directly involves a stock in your portfolio … If you are a long-term investor and have not taken action to protect your portfolio from the downside move, you need to act now.

Either buy an inverse ETF that gains in value as the market drops, or buy some insurance by purchasing long-term puts on the Spyders or QQQQ.

At the time of this writing, you could get a December 2009 123 put on the SPY for $12.50, or $1250 since options are priced in 100s.  Should the S&P drop all the way back down to the 800 level as it did in 2003, these options would be worth at least $4,300 each.

If you purchase multiple contracts, this could go a long way towards offsetting the losses from the rest of your portfolio.

Source: Wall Street’s Mood Changes With The Weather, But The Seasons Are Still Predictable

And the U.S. is experiencing nothing if not a major cyclical downturn right now. Oil is still double the price it was last year, house prices are tumbling, and inflation and unemployment are on the up.

The best way to play this situation is to short the major ETFs that track the U.S. stock markets the next time the indexes flirt with bear terrritory. Andrew recommends shorting the PowerShares QQQ or the Diamonds Trust ETF...

I saw the words scrolling across the bottom of the screen this morning as I munched on my morning bowl of cereal. With each bite of the crunchy meal, the message spelled itself out.

“Dow reaches bear territory once again,” the bold, red letters spelled.

As the talking heads on the screen continued to dissect the upcoming presidential election, I could not help but veer off into the world of economics, especially the rather unique economic state this country is in. That one simple sentence got my mind running in high gear and the sun was not even over the mountains yet.

For weeks now, the Dow has hovered just above official “bear territory,” the level that, depending on your definition, denotes a 20% drop from recent highs. We’ve reached the critical barrier several times, but have witnessed a small, but fortunate, bounce each time. It will not last.

In fact, it can’t. It’s impossible.

Times up, market’s down

Take a look at what’s going on: As each day passes, the so-called “short economic downturn” the nation’s economic leaders have promised not only continues, it worsens.

Oil prices remain high. The real estate market is crumbling. Unemployment rates are shooting up. And inflation is instantly eradicating any hopes of a quick way out. Wasn’t the second-half of the year supposed to mark a major rebound? Phooeey…

We are in the choking grasp of a strong cyclical downturn. The only way out is to scrape bottom, wait until the economic wheel stops turning, and hope it begins moving in the opposite direction.

You will know when we hit bottom the next time the message I mentioned above scrolls across your screen. So far, technical trading aspects are the only thing keeping this market afloat. As soon as historic levels are hit, automated trades are triggered and the market gets a strong, but temporary jolt of buying activity.

These computerized trades are the way institutional traders spread out their entry prices and protect themselves. The sudden activity is just enough to trick novice investors into believing the downturn is over.

Unfortunately, the money is quickly drying up. Soon, there will not be enough funds to create the bounces we have seen. We will officially enter bear territory and stay there for months, if not years. It will be a crazy, rough ride. But it could be a highly profitable one.

When most people are sure the market is going to head south, they sell their equities and head for cash investments. It’s great for protecting your hard-earned cash, but a horrific idea if you want to grow your wealth.

Technical bounce, fundamental losses

For seasoned traders, a major downturn is simply another opportunity to make money. The harder Wall Street falls, the more they will make. Smart investors use short positions in options and equities to bet against share price appreciation. It’s exactly what you should be doing.

Next time we see the markets flirting with bear territory, take a short position in one of the major ETFs that follow the overall market like the PowerShares QQQ (NASDAQ:QQQQ), which tracks the smaller high-tech companies on the Nasdaq, or the Diamonds Trust (AMEX:DIA), which tracks the nation’s blue chips.

If you really want to earn some money, enter a short-term put options play in the same funds. It is a bit riskier, but the rewards are exponentially higher. (Note: If I see a surefire options opportunity, I’ll let you know.)

It’s Econ101 all over again

No matter who the Fed bails out next or which major bank announces a huge write-off, the markets will continue their predictable actions. After all, the names of the companies and industries may change, but it is still the same economic laws and forces at work.

Once the wheels start to turn, you can’t stop them. You might as well ride the momentum and make some nice profits along the way. Don’t be scared of a bear market. It merely means you must adjust your strategy, invest wisely, and hang on for a wild ride. Smart investors are in for some exciting times.

Source: Short the Powershare QQQ and Diamonds Trust to Profit from Bear Territory

When you’ve got a market hurricane wreaking havoc with investors’ portfolios, cash is the air in the life raft that keeps stock prices afloat.

As a technology sector specialist, I can tell you that this is a particularly good sector to focus on when you’re looking for profitable ideas in a volatile market. This is simply because the group contains companies that offer better than average free cash-flow growth.

And in a bear market, cash truly is king. Even if the market is flagging, a company that boasts a strong cash position has a number of options available that can support its share price. This includes:

• Tactical acquisitions that sustain earnings growth. A good example here is Oracle (Nasdaq: ORCL).
• Share buyback plans that squeeze out short-selling interest – like we’ve seen with eBay (Nasdaq: EBAY).
• Cash distributions, as in the case of Microsoft (Nasdaq: MSFT).

The common denominator that these three companies share is that they all provide infrastructure that supports their customers’ businesses.

And in a bearish environment, this is crucial, as it gives them the option to raise prices in order to offset the impact from tougher selling conditions where fewer units are sold.

This kind of flexibility is evident in the performance of the Powershares QQQ (Nasdaq: QQQQ) – the ETF that tracks the Nasdaq 100 index. It’s outperformed the S&P 500 by 26% so far in 2008.

Source: How To Invest In Technology During A Down Market