100 Hit Combo Tales of Symphonia Easy
The Press loves to dramatize the risk and under-report the opportunity. Corrections are real and they risk being wrong on the future. After a bit of normal volatility in Japan, you now understand why we diversify our portfolios. South Africa and Brazil are up nicely since the first of the year.
Major indexes (and related exchange-traded funds) in domestic U.S. and Japanese stock markets gave back their 2006 year-to-date profits last week in surprise corrections. In Japan it was just letting off steam from a strong rising market but in the U.S. it was giving up profits that it hadn't earned in some time.
If you have been subscribing to The Proactive Fund Investor with Bill Donoghue, you have been consistently warned away from the domestic stock market whose only real profits have been earned and lost since the first of the year. We have also steered you toward foreign ETFs with spectacular results. Last week we recognized the slackening opportunity in the Topix ETF ITF with a SELL recommendation while staying with the broader MSCI Japan EWJ ETF. Meanwhile we recommended a shift to South Africa which is up 11.3% this year.
We also differentiated our advice from the five-asset Sector ETF Portfolio and the more broadly-based PFI's Best Portfolio, holding on to ITF in the latter while selling it in the former.
Intermediate-term momentum tells it all and that is the basis for our recommendations. Stay with the leaders and your odds for profits improve.
The opportunities are where the momentum rests
We have also been enjoying (in our Sector ETF and PFI's Best Portfolios) the benefits of strong trends in Latin America, Northern Asia and emerging markets (as well as developed foreign stock markets in South Africa, Canada and Latin America).
The difference between the two corrections in Japan and the U.S. is clear. Japan's problems were limited to their ability to process a large volume of orders and one company's alleged problems. In the U.S. stock market it was the lackluster earnings of a few bellwether stocks including Yahoo YHOO and Intel INTC, a much more systemic economic challenge. Throw in a potential nuclear threat from Iran, a warning from terrorist Osama bin Ladin and high energy costs and you have real economic challenges.
Is a new Fed chairman good news?
Does anyone remember what happened within two months of the last time we changed leaders at the Fed? Greenspan assumed the chairmanship on August 11, 1987 and two months later the "Crash of 1987" occurred. Now, 19 years later, we are facing another transition in leadership in a world where the markets move much faster. I'm not saying it's a given; I am simply saying that the economy is more sensitive today than then.
I was the regular guest analyst on Financial News Network's (CNBC's predecessor) MarketWatch with Bill Griffeth each Friday for most of 1987 and I can tell you that those were challenging times. Yes, the market was back to normal by year-end but its confidence was shaken for years even in those less-troubled times.
Should you be shorting the domestic market? Not yet!
Don't jump on to the Rydex and ProFunds bear market funds yet. This is a gradual process but the risk of a bear market in the coming years, just as traditional long-only bull market mutual funds' three-year performance is looking so good, is a real risk. Wait until the single-beta style-box funds we recommend in Rydex and ProFunds start to rotate to bear market positions to move in.
A bear market does not happen in a single day any more than a bull market does. But don't deny a long frustrating bear market may be returning to the domestic stock markets.
The domestic stock markets may be defining a new and clear trend (exactly what proactive investors want to see); the opportunity, however, will likely be in bear market funds, not buy-and-hold funds.
For now, our advice has been to avoid this lackluster domestic market and it may remain that way if the foreign stocks offer stronger trends and greater profit potential -- or if we find a long and strong domestic downtrend.
Japan had profits to give back
Japanese stocks experienced a sell off last week. They simply had too aggressive a run-up last quarter and investors (including PFI) were taking some profits. Will Japanese stocks return to profitability? Maybe, but our portfolios have already diversified broadly elsewhere in safer, more predictable trends.
Last Monday, we recommended taking profits on the Sector ETF portfolio's iShares S&P 150 Topix, which represents 150 highly-liquid large-cap stocks on the Tokyo market. The position was moved to South Africa. This is a normal correction that will happen in volatile markets. That is why we diversify among several positions, five in the Sector ETF.
That leaves us exposed to the Japanese stock market through 8% or less positions in Topix and Japan ETFs in PFI's Best Portfolio. Isn't it fortunate that we didn't recommend ProFunds UltraJapan, the double-beta fund which roared in the last quarter and ended up the top-performing fund of 2005?
Why didn't we recommend ProFunds UltraJapan when it was doing so well? First, we choose funds based on strong upside trends with minimum volatility. UltraJapan earned its excess return over our safer choices in Latin American ETFs, for example, only in one quarter, the last of 2005. It was a riskier bet with a less stable trend and would not have met our criteria. Second, why invest in a ProFunds Japanese fund when Japanese ETFs are much cheaper? Third, our ProFunds portfolios can find enough returns over the long-term from domestic volatility for which they are uniquely qualified.
Proactive Index Portfolios
Still no compelling domestic opportunities
As much as you may want to make money in the U. S. stock market, the odds are slim for the foreseeable future. Maybe it's time for you to talk with your broker and your employer about your choices.
You have to wonder why your broker or advisor is always talking about domestic investments only and counseling investing only 10-20% of your assets in lackluster diversified international funds. The usual reason is because your advisors or brokers don't follow foreign stock markets and really don't have much to offer or that they don't want to proactively manage your portfolio.
For now, don't invest domestically until the trends are clear and that will probably be down into a bear market. Watch here for recommendations when that happens.
Rydex Sector Portfolio
No changes this week.
| Ticker | Fund Name | Purchase | Weight | Change |
| RYOCX | Rydex OTC (Long NDX 100) | 8/2/05 | 20% | 2.33% |
| RYAVX | Rydex MidCap Value (Long S&P MidCap 400/Citigroup Pure Value Index) | 7/26/05 | 20% | 2.13% |
| RYBHX | Rydex MidCap Growth (Long S&P MidCap 400/ Citigroup Pure Growth Index) | 7/26/05 | 20% | 6.95% |
| RYWAX | Rydex SmallCap Growth (Long S&P SmallCap 600/Citigroup Pure Growth Index) | 7/26/05 | 20% | 2.59% |
| RYZAX | Rydex LargeCap Value (Long S&P 500/Citigroup Pure Value Index) | 01/18/06 | 20% | -1.01% |
We built this five-fund portfolio from the eight bull market and five bear market (inverse) single-beta stock index funds with the strongest positive price momentum that are currently available from Rydex. Recommendations are evaluated weekly. Often the most economical trading platform for this portfolio is to invest directly with Rydex Investments if you can qualify for the $25,000 minimum initial investment ($50,000 for on-line trading). Avoid traditional brokers which often require unwarranted minimum holding periods, short-term trading fees and excessive trading costs.
Rydex Index Performance
| 1 - Week | 4 - Weeks | 12 - Weeks | Since Inception |
| -1.64% | -0.96% | 5.80% | 1.40% |
Performance as of Friday's close. Inception began on July 26, 2005, the day following the first issue of the Proactive Fund Investor, with Bill Donoghue.
ProFunds Index Portfolio
As you will notice, these profits are just making up for lost time from the previous best choices which lost money.
No changes this week.
| Ticker | Fund Name | Purchase | Weight | Change |
| MGPIX | ProFunds MidCap Growth (Long S&P MidCap 400/Barra Growth) | 10/25/05 | 20% | 9.89% |
| MDPIX | ProFunds MidCap (Long S&P MidCap 400) | 7/26/05 | 20% | 5.91% |
| SGPIX | ProFunds SmallCap Growth (Long S&P 600/Barra Growth) | 11/29/05 | 20% | 2.63% |
| MLPIX | ProFunds MidCap Value (Long S&P MidCap 400/Barra Value) | 12/20/05 | 20% | 2.73% |
| OTPIX | ProFunds OTC | 11/15/05 | 20% | 1.77% |
We built this five-fund portfolio from the eleven bull market and four bear market (inverse) single-beta stock and currency index funds with the strongest positive price momentum currently available from ProFunds. The most economical trading platform for this portfolio is to invest directly with ProFunds if you can qualify for the lower-than-Rydex $15,000 minimum initial investment. Avoid traditional brokers which often require unwarranted minimum holding periods, short-term trading fees and excessive trading costs.
ProFunds Index Performance
| 1 - Week | 4 - Weeks | 12 - Weeks | Since Inception |
| -1.61% | 0.60% | 7.84% | 2.74% |
Performance as of Friday's close. Inception began on July 26, 2005, the day following the first issue of the Proactive Fund Investor, with Bill Donoghue.
Double-Beta Portfolio
As you will notice, these profits are just making up for lost time from the previous best choices which lost money.
No changes this week.
| Ticker | Fund Name | Purchase | Weight | Change |
| UMPIX | ProFunds Ultra Mid-Cap (Long S&P Mid-Cap 400) | 7/26/05 | 34% | 10.00% |
| UOPIX | ProFunds Ultra OTC (Long NDX 100) | 11/1/05 | 33% | 11.38% |
| UAPIX | ProFunds Ultra Small Cap (Long Russell 2000) | 7/26/05 | 33% | 5.34% |
We built this three-fund portfolio from the five bull and five bear market double-beta domestic equity funds currently available from Profunds for long-term investors seeking a more aggressive portfolio. The safest time to start investing might be after the next SELL signal by investing in the new BUY recommendation. Funds are selected with the strongest positive price momentum.
Double-Beta Performance
| 1 - Week | 4 - Weeks | 12 - Weeks | Since Inception |
| -3.90% | 1.77% | 17.49% | 6.75% |
Performance as of Friday's close. Inception began on July 26, 2005, the day following the first issue of the Proactive Fund Investor, with Bill Donoghue. ETF shares change throughout the trading day, just like individual stocks. Pricing on this portfolio reflects the closing prices on the day of purchase or sale. Your actual performance may vary.
Sector ETF Portfolio
As you can see, we are out of the Japanese market with last week's SELL on Topix ETF. Even with the recent pullbacks this portfolio is worth every bit of volatility as these are the best opportunities in today's markets. The volatility is well within the normal volatility. Remember, if it ain't volatile, it can't go up a lot.
No changes this week.
| Ticker | Fund Name | Purchase | Weight | Change |
| ILF | iShares S&P Latin Am 40 | 7/26/05 | 20% | 42.82% |
| EWZ | iShares MSCI Brazil | 8/9/05 | 20% | 37.28% |
| EWW | iShares MSCI Mexico | 7/26/05 | 20% | 31.32% |
| EZA | iShares MSCI South Africa | 01/18/06 | 20% | 3.25% |
| EWY | iShares MSCI South Korea | 10/18/05 | 20% | 19.87% |
| Money Market | 0.00% | 0% |
We built this five-position portfolio using the five ETFs with the strongest positive price momentum from a universe of 124 sector, style-box, single-country and regional ETFs.
ETF Performance
| 1 - Week | 4 - Weeks | 12 - Weeks | Since Inception |
| -2.55% | 4.69% | 19.95% | 31.27% |
Performance as of Friday's close. Inception began on July 26, 2005, the day following the first issue of the Proactive Fund Investor, with Bill Donoghue. ETF shares change throughout the trading day, just like individual stocks. Pricing on this portfolio reflects the closing prices on the day of purchase or sale. Your actual performance may vary.
Cool Income Portfolio
Not bad total performance for only six months in a low-risk portfolio with the proactive guts to profit from rising interest rates as well and then only when rates rise, not when you are afraid they might rise.
No changes this week.
| Ticker | Fund Name | Purchase | Weight | Change |
| FSICX | Fidelity Strategic Income | 7/26/05 | 50% | 3.14% |
| FDRXX | Money Market | 7/26/05 | 50% | 1.73% |
This deceptively simple portfolio takes advantage of two 50% allocations to: (1) High-Yield Bonds. As a long-term investment, Fidelity Strategic Income Fund (FS ICX) is a well-managed multi-asset bond fund which proactively manages both its bond maturities and allocation to high yield bond markets. (2) Government Bonds. The portfolio seeks to profit from the Rydex Juno during rising interest rate markets as well as money market positions.
Cool Income Performance
| 1 - Week | 4 - Weeks | 12 - Weeks | Since Inception |
| 0.00% | 0.50% | 1.65% | 1.80% |
Performance as of Friday's close. Inception began on July 26, 2005, the day following the first issue of the Proactive Fund Investor, with Bill Donoghue. Money Market returns based on Fidelity Cash Reserve (FDRXX). Your yields may vary.
PFI's Best Portfolio
This infrequently-traded portfolio is producing some very attractive returns, some of which are likely to be very tax-efficient for a proactive portfolio which may well produce some long-term capital gains before it sells.
In retrospect, it looks as if the Japanese market may well rebound from the one-stock correction mostly due to slow order-processing of panic selling. Does that remind you of the 1987 Crash which was also mostly a non-economic event, not related to strong economic reasons and more to processing reasons?
No changes this week .
| Ticker | Fund Name | Purchase | Weight | Change |
| ILF | iShares S&P Latin America 40 | 7/26/05 | 8% | 42.82% |
| EWZ | iShares MSCI Brazil | 7/26/05 | 8% | 57.76% |
| EWW | iShares MSCI Mexico | 7/26/05 | 8% | 31.32% |
| EWY | iShares MSCI South Korea | 7/26/05 | 8% | 23.98% |
| EWC | iShares MSCI Canada | 9/7/05 | 8% | 11.50% |
| EZA | iShares MSCI South Africa | 9/27/05 | 8% | 25.73% |
| ITF | iShares S&P/Topix 150 | 11/1/05 | 8% | 7.45% |
| EWJ | iShares MSCI Japan | 11/1/05 | 8% | 8.47% |
| EEM | iShares MSCI Emerging Markets | 11/15/05 | 8% | 14.27% |
| VPL | Vanguard Pacific VPRS | 12/28/05 | 8% | -0.74% |
| FSICX | Fidelity Strategic Income | 7/26/05 | 10% | 3.14% |
| FDRXX | Money Market | 7/26/05 | 10% | 1.73% |
The portfolio holds about a dozen positions chosen from over 150 current ETF, Rydex and ProFunds no-load sector index funds as well as a 20% position in the Cool Income Portfolio. In troubled markets, this portfolio can be as much as 50% in money funds.
PFI's Best Performance
| 1 - Week | 4 - Weeks | 12 - Weeks | Since Inception |
| -2.39% | 2.96% | 14.67% | 19.86% |
Performance as of Friday's close. Inception began on July 26, 2005, the day following the first issue of the Proactive Fund Investor, with Bill Donoghue. ETF shares change throughout the trading day, just like individual stocks. Pricing on this portfolio reflects the closing prices on the day of purchase or sale. Your actual performance may vary. Money Market returns based on Fidelity Cash Reserve (FDRXX). Your yields may vary.
Q&A
I am the "wise subscriber" you wrote about a few weeks ago. I have taken your advice and have most of my Rydex/Profunds money on its way to Scottrade. Using your two best portfolios, how should it be invested? By increments or 100% at once? Increments of 25%, 33% or 50%? If in increments, how much of a gain (% wise) before the next increment? Thank you very much. Your newsletter is perhaps the best I have ever read! -- Gene
Thanks for your compliment. Good move to shift to Scottrade. At Scottrade, you have access to our Sector ETF and PFI's Best portfolios at low trading costs, which I suspect will produce the best returns for you over the coming year. If the bottom falls out of the domestic market you can also consider using the domestic bear market funds at Rydex and ProFunds.
As to when to start, the corrections in the foreign ETFs make a strong argument to wait a bit to see how this shakeout settles out in the next week or so. These two portfolios are well-diversified, but when you are just starting to invest in these portfolios, timing can make a difference. Take a deep breath and wait for a 5% to10% pullback in some of these country funds, watch for shifts in our recommendations and then build the entire portfolio all at once.
I don't ever know which country funds will be the most successful. I am impressed with the Latin American ETFs which have strong reasons (energy, growing economy, etc.) for growth but I would be careful in the Japanese market before getting back in. The back-up potential funds to Japan can be seen in PFI's Best: Canada and South Africa.
Watch those portfolios for the next two or three weeks and then move in in a fully diversified manner.
The rule of thumb is: "Address the known risks; diversify to avoid the unknown risks."
I appreciate your practical wisdom of the market. However, beneath the homespun chit chat, a grasp of deeper understanding is often revealed.
Would you please discuss the relative merits of the iShares:MSCI EAFE EFA ETF and surrogates as a global market index fund and as a hedge against a weakening dollar? Thank you -- Wes
Thanks for asking. EAF is a one of Barclay's iShares ETFs tied to the international EAFE index. It's a broadly diversified international fund. If you want to profit in international as well as domestic investing diversify among the leaders, don't spread your risks too widely. International markets are as different and individual as domestic sectors.
As a hedge against the weakening dollar it would only be partially effective because it includes both emerging markets and developed markets.
Developed markets are often countries and regions whose currencies are independent of the dollar and thus investing in those markets may be a hedge against a weakening dollar. As the dollar weakens each day, when the foreign currency-denominated developed country stocks are valued each day in dollars they buy more dollars. If the dollar strengthens, the stocks buy fewer dollars.
Emerging markets are smaller countries often with their currency tied directly or indirectly to the U.S. dollar. Therefore, they are not a good hedge against the dollar.
Successful international investing at best has two purposes; first, to profit from rising stock values and two, to profit from currency opportunities. Therefore, the best way to choose international investments is to invest in low-cost liquid ETFs which have the strongest trends based both on stock growth and currency benefits. It's hard to separate the two; so, why not look at the result and avoid speculating which reasons are driving the profits?
As you can see by our investment results, by investing in what's going up and cutting our losses on those going down, and letting our strongest winners run, has produced superior results at surprisingly-lowered diversified portfolio risks.
EAFE is too broad an index to maximize both opportunities. If currency shifts are driving profits or if stock profits are driving profits, the leading funds with the longest and strongest trends are the best choices. Being proactive in updating your portfolio to stay in those funds and being disciplined can make all the difference.
Send your questions to mwfeedback@marketwatch.com and be sure to note that it's for PFI.
Bill Donoghue
Source: https://www.marketwatch.com/story/a-tale-of-two-corrections
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