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

Source: Http://www.ritzholtz.com

This is a historical chart of the S&P 500’s Price-to-earnings ratio (P/E). For those that don’t know, a P/E ratio tells you how many years of a company’s earnings it will take to buy it outright.

So – if you buy a company for $1,000, and it earns $100 a year, you’re said to have a P/E ratio of 10 ($1,000 / $100).

In other words, it would take you ten years to break even (As a buyer).

Today, the S&P has a P/E of 12.6. But in the early 20’s, 30’s and late 80’s, this ratio dropped to as far as 5.
This can only mean one thing: Stocks have just entered fair value… the market as a whole isn’t even cheap yet!

The reason why is because we’re in a market where both earnings and stock prices are dropping dramatically.

This also means that shorting the S&P 500 as a whole is still a generally safe bet. You can do that by issuing a short-sale on the SPDR S&P 500 ETF (NYSE: SPY).

This from Investment U:

With the stock market’s historic drop this year, some investors have fled to cash. Others are cautiously buying. Most, however, are sitting on their hands.

They shouldn’t be.

Even if you lack the cash – or the willpower – to buy into this market, there is still a very smart move you can make: switch.

Switch from your poor-performing, high-cost, tax-inefficient stock and bond mutual funds to index funds or exchange-traded funds (ETFs).

It’s a very smart move. Here’s why…

Why Choose Exchange Traded Funds Over Mutual Funds?

Compared to exchange traded funds, most mutual funds are a lousy deal, here’s why:

• Each year more than three-quarters of them fail to match the performance of their benchmarks.
• Many are loaded with front-end or back-end loads, 12b-1 fees, high management costs and other expenses.
• Moreover, even when these actively managed funds fall sharply, they still often distribute annual capital gains to shareholders, in effect handing shareholders a paper loss and a tax bill at the same time.

Don’t stand for it. Now is your chance to fight back.

Switching to Exchange Traded Funds Will Save On Taxes

Switch from your underperforming mutual funds to index funds and exchange-traded funds – and save yourself thousands of dollars in taxes in the process.

The IRS allows you to take losses each year to fully offset any realized capital gains. And also allows you to take capital losses to offset up to $3,000 in earned income.

In a year as nasty as this one, of course, you probably don’t have too many realized capital gains to worry about.

You should make this switch anyway. The IRS allows you to carry forward your losses indefinitely to offset future capital gains.

As bleak as the outlook is today, there will be capital gains in your future and, eventually, the tax on them is going to be higher than it is now.

Aside from the thousands you’ll save in taxes (and expenses) in the years ahead by making this switch to exchange traded funds, there is an important psychological reason to do it.

When you get your statements in 2009 and beyond, instead of looking at a smorgasbord of losing positions you’ll be looking at winners. You may not end up buying at the very bottom – few do – but you will have bought a whole lot closer to it than you did originally.

Exchange Traded Funds – Turning Market Lemons Into Lemonade

So take the lemons the market has handed out so abundantly this year and turn them into lemonade with exchange traded funds. Here’s how:

Sell Your Losing	Replace It With:
Gold Stock Funds	Market Vectors Gold Miners ETF (NYSE: GDX)
U.S. Large-Cap Stock Funds	S&P 500 ETF (AMEX: SPY)
U.S. Small-Cap Stock Funds	Vanguard Small Cap ETF (NYSE: VB)
International Stock Funds	iShares MSCI EAFE (NYSE: EFA)
Corporate Bond Funds	Vanguard Total Bond Mkt ETF (NYSE: BND)
Junk Bond Funds	iShares High Yield ETF (NYSE: HYG)
Inflation-Adjusted Bond Funds	iShares Lehman TIPS (NYSE: TIP)
Emerging Market Stock Funds	iShares Emerging Mkts (NYSE: EEM)

Using Identical Exchange Traded Funds As Smart Tax Moves

If you’re already invested in exchange traded funds, incidentally, you can still make the same smart tax move by selling your losers and moving into virtually identical funds.

For example, you can take a loss in one S&P 500 Index Fund (AMEX: SPY) and replace it with, say, this S&P 500 Index Fund (AMEX: IVV). Even though these funds have the same benchmark and are virtually identical, they are different funds, so the IRS allows the switch.

(For a complete list of ETFs at Fidelity.com.)

However, you cannot sell a fund and buy back the exact same one and qualify for this deduction (unless you wait at least 30 days). If you do, you run afoul of the wash-sale rule.

Incidentally, if you own individual shares that are down but for which there is no logical replacement (think Apple or Berkshire Hathaway) and you don’t want to sell and risk that the stock will be substantially higher 30 days from now – always a possibility from these depressed levels – you can double down on your stocks now, then sell your higher-cost shares the last week of December. (You will, of course, be doubling down on your risk for the next 30 days.)

If you plan to do this, however, you need to do it by the end of the month. Once November ends, it will be too late to do it for the year.

Bear in mind, you cannot take tax losses in an IRA, 401(k) or other qualified retirement plan. But you should still consider making the switch to ETFs and index funds for the cost advantages and psychological benefits I’ve described.

Source: Exchange Traded Funds: An Investment Move You Need to Make…

This from Penny Sleuth:

By now, you’ve probably heard a lot about exchange-traded funds (ETFs). Since their inception in the early 1990s, the financial world has been aflutter with investors hungry for the efficiency and ease of buying ETFs. Want to know how you can cash in on the ETF craze? Here’s a look at exchange-traded funds…

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If you’re wondering what an ETF is, you’re not alone. ETFs are portfolios that you can buy and sell ownership in. Basically, an ETF is a lot like a mutual fund that trades on an exchange like a regular stock. That’s an important distinction, because unlike open-ended funds, which buy back their own shares, ETF owners can sell their funds to anyone in the stock market who’s willing to buy. That and higher levels of transparency make for an investment that trades much closer to its actual value than a regular mutual fund.

Advantages of ETFs

There are a few reasons why ETFs look good… ETFs offer instant diversification, lower costs, and ease of purchase that you can’t find anywhere else.

As an investor, one of the smartest things you can do with your portfolio is diversify. That’s because a diversified portfolio can make more gains at a lower risk than a single investment. Since ETFs own a bunch of different securities (like stocks and bonds), when you buy an exchange-traded fund your portfolio is instantly diversified.

Besides diversification, one of the biggest reasons to get into an ETF is cost. For starters, ETFs can substantially reduce the transaction costs associated with diversification. Instead of paying commissions for each individual stock you buy to diversify your portfolio, when you buy an ETF, you only pay commissions for the ETF itself. ETFs also have considerably lower expense ratios than mutual funds.

Expense ratios are the management fees funds charge to their investors. With an ETF, expense ratios are generally between 0.1% and 1% — compare that to the 1% to 3% generally charged by mutual funds, and it’s clear that ETFs are the winner here.

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One of the reasons ETFs have been so successful is their accessibility. ETFs trade on stock exchanges, which means that any investor has access to them without minimum investments restrictions. That means that they’re the easiest way to get into a managed fund investment.

Kinds of ETFs Available

Today, new types of ETFs are springing up, giving individual investors more investment options than ever before. Here are some of the main types of ETFs:

Stock Index ETFs: The most common type of ETF today. These funds are designed to track major stock indexes like the S&P 500 or the Dow Jones Industrial Average. In fact, the most popular ETF of all-time, Standard & Poor’s Depositary Receipts (AMEX:SPY), is an ETF that tracks the performance of the S&P 500.

Bond funds: Another type of investment represented by ETFs. Funds like the iShares Lehman Inter Govt/Credit Bond ETF (NYSE:GVI) aim to match Lehman Bros. bond indices (which continue to operate under Barclays ownership).

Commodities ETFs: A category of exchange-traded fund that has popped onto the scene recently. Commodities — like oil, gas, grains, and gold — were once a tougher market to get into for small investors. Now commodities plays like the U.S. Oil Fund (AMEX:USO), which significantly outperformed the S&P 500 in 2008, are showing the financial world that opportunities abound in the ETF world.

Managed ETFs: In 2008, the Securities and Exchange Commission decided to allow actively managed ETFs for the first time, meaning that ETFs weren’t relegated to tracking an index or commodity. The first group of actively managed ETFs was put out by PowerShares in July 2008.

Finding Small-Cap ETFs

As a penny stock investor, small-cap ETFs are a very interesting idea. There are a number of index ETFs that invest in small-cap plays, including the iShares Russell 2000 Index ETF (NYSE:IWM), the Vanguard Small-Cap ETF (AMEX:VB), and the iShares Morningstar Small Core ETF (NYSE:JKJ).

We’ll continue to pour through the hundreds of different funds available to small-cap investors. We’ll let you know when we find something worth investing in.

Source: Small-Cap Investor’s Guide to Exchange-Traded Funds (ETFs)

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