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This Bear Market and The Dividend Paying Stock Trap

Thursday, October 30, 2008: Issue #571
by Paul Moore, Contributing Editor & Technology Specialist, Smart Profits Report

On July 7, 2008, the S&P 500 crossed the threshold into bear market territory, having slid 20% from its high on October 9, 2007.

Today the S&P is trading at 935 - a 40% drop from its high of 1,565.15. If you take the 14 bear markets since the Great Depression, the average decline was 38%. At the low on October 28, the decline was 45.5%.

So are we at the bottom? Perhaps. But consider this…

The average duration of these bear markets was 18.4 months. Given that we’re in the 13^th month now, that puts us relatively close to the end, right?

Not quite. Bear markets aren’t created equal and if you only take the ones that saw declines in excess of 40%, the average duration is 28.4 months.

So if the current bear plays out in this way, we aren’t even half way through. Combine this with an unemployment rate of 6.1% - with the expectation that it will rise above 7% - and it seems much less likely that we’ve reached the bottom.

What does seem certain, however, is that we’re likely in for a long recovery, which could substantially jeopardize cash flows. And that’s a key issue when it comes to investing in companies on the basis of a dividend. 

Just Because It’s A Touted Bear Market Strategy Doesn’t Mean It’s A Good Idea

Amid the market’s mess sliding further and further into a bear market, many pundits have touted the benefits of dividend paying stocks. It’s an issue we wrote about here a couple of weeks ago.

While it’s true that dividends bring you a form of income, does it really put a floor under a stock? The argument is pretty simple. Many companies have products that are such an integral part of day-to-day life that they are…

Very unlikely to disappear.

They’ve built up balance sheets that are strong enough to survive a multi-year downturn. 

So instead of high share price appreciation, they repay their shareholders by passing along the profits in the form of dividends.

However, as cash flows dry up, companies cannot always support their dividends and investors can suffer a second whammy as the dividend gets cut and the stock finds a new level at the same yield.

Here’s the way to do it…

The Key To Navigating Through A Bear Market With Dividend Paying Stocks

In a bear market, it becomes that much more necessary to be tactical. Buying dividend paying stocks in this type of prolonged downturn does provide a good return if the stock remains stable. But if a cash flow shock occurs, dividends could suffer and the stocks that were supported at the beginning of the bear market substantially underperform later on.

You can avoid this trap by looking at the key driver of dividend paying stocks - cash flow.

In the heat of a bear market, investors will always be concerned about how far top-line growth can drop, but good management teams can handle this by cutting expenses.

However, the fixed depreciation of hard assets that are stuck to the balance sheet can make profit look worse than cash flow. While profit may look bad in the short-term, I have never seen a company cut a dividend that was 50% of free cash flow (or less).

The bottom line is that as long as free cash flow holds up, the management team has options and the dividend will be safe.

The last thing a company with a historically stable dividend will do is cut its dividend, as it would entirely change the shareholder base by boxing out value investors that have a yield hurdle.

So when it comes to dividend-paying stocks, while revenue and earnings growth are obviously important, be more concerned with the money on the cash flow statement.

Paul Moore

Related Articles at: www.smartprofitsreport.com:

Dividend Stocks: A Great Investment Strategy For Bad Times

You Can Profit In A Miserable Market Like This - Here’s How…

How To Box Clever Against A Hostile Market And Score “Knockout” Yields Of 21.5%

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Your Presidential Vote And What It Means For Your Pet Picks

Tuesday, October 28, 2008: Issue #570
by Martin Denholm, Managing Editor, Smart Profits Report

It’s almost time to cast your presidential vote; one week from today, America will elect its next president.

What was a hotly contested race a few weeks ago now appears to be swinging in favor of Democratic candidate Barack Obama, but that doesn’t necessarily mean Election Night will be much less dramatic.

The question is: How will this major event and changing of the White House guard affect the economy, the stock market - and more importantly, individual investors? Many investors are already sick to death of the drama that the stock market has tossed at them this year, and they aren’t likely to welcome much more.

Let’s take a look…

How Your Presidential Vote Counts… Or Doesn’t

Don’t get me wrong, your presidential vote counts, but not to make any of the immediate changes you would like to see right now.

Despite the current rhetoric and hype surrounding the candidates’ respective policies, measures enacted typically don’t make any serious dent on the economy for a year or two after they’re passed into law.

Yale Hirsch, one of the co-authors behind the respected Stock Trader’s Almanac has studied the effect that presidential election cycles have on the stock market. And his research indicates that the market generally follows a pattern, regardless of whether a Republican or Democrat administration wins the White House.

According to the theory, here are the stock market returns between 1948 and 2007…

• The first post-election year is typically the worst performer in the presidential cycle, with the S&P 500 posting a 7.3% return
• The second year sees the highest record of bear market bottoms, with the S&P recording a 10.1% advance.
• In the third year of the presidency, the market picks up dramatically, notching up a 22.9% gain.
• The final year of a presidency sees more uncertainty creep into the market, with a 12.1% gain. That’s still above average, though.

While the past four years haven’t followed the above trend, this is an entirely different time, with the U.S. experiencing an epic financial crisis right on top of the presidential election.

And the market could easily fall back into this pattern… because right on schedule, economists foresee recession conditions over the next two years.

Your Presidential Vote In Action On Healthcare

And as the general populace has repeatedly made known, people are casting their presidential votes based on one key issue: the economy.

Of course, for the majority of Smart Profits Report readers, the issue is slightly more specific. You want to know how the next commander-in-chief is going to affect your pet stocks.

As an investor, if you’re looking for a map of how the next cycle will play out - and who could be affected the most - a lot depends on whether the winning candidate can live up to his promises. But that can depend largely on who controls Congress and the importance of the sector.

With regard to healthcare, this election is once again filled with candidates’ promises of how they’re going to create affordable healthcare for all Americans - a task that always seems to be easier said than done.

According to the International Strategy and Investment (ISI) research firm, a McCain administration would probably represent good news for firms like Pfizer (NYSE: PFE), Genzyme Corp. (Nasdaq: GENZ) and Genentech (NYSE: DNA), since they’d be less likely to face restrictions on drug prices.

In addition, McCain may not opt for as much of an overhaul of healthcare as Obama, so managed care firms could see an advantage. Obama would seek changes to Medicare and crack down on medical malpractice areas, so look for managed care and insurance companies respectively to undergo Obama’s favorite word… change.

And that’s especially true since both men have espoused unique alternatives to our current system, the healthcare sector will see modifications regardless.

Regardless Of Your Presidential Vote, Renewable Energy Wins

Now when it comes to the energy sector as a whole, your presidential vote doesn’t really matter since both candidates hold strong stances on improving it. As with every other subject, they simply disagree on how to go about those improvements.

Both Obama and McCain support crucial efforts to explore alternative energy in order to relieve some of America’s dependence on getting energy from volatile nations.

Earlier this year, McCain even went so far as to offer a $300 million reward for anybody who could design a “battery package that has the size, capacity, cost and power to leapfrog the commercially available plug-in hybrids or electric cars.” And both men attended former president Bill Clinton’s National Clean Energy Summit in Las Vegas, Nevada, back in August.

McCain has also thrown his weight behind greater offshore drilling and “clean coal” production, right alongside ethanol production from corn. Obama has expressed more interest in other forms of alternative energy, such as wind and solar power - two areas that could receive more subsidies and mandates under his administration.

In this respect, ISI says solar leader like First Solar (Nasdaq: FSLR), wind turbine manufacturer Vestas Wind Systems (OTC: VWDRY.PK) and waste-into-energy firms like Covanta Holding (NYSE: CVA) could see benefits.

In Conclusion, Your Presidential Vote Means Something… Later

The bottom line here is that while both candidates are busy championing their ideas and policy proposals to the country and certain sectors and stocks will benefit more than others from a regime change, the overall stock market isn’t going to be as affected as some people might think.

According to John Merrill, chief investment officer of Tanglewood Wealth Management, the market isn’t really paying that much attention to the candidates, no matter how much both like to speak out. “Today, the market and the economy are shaping events much more than the presidential election.”

Best regards,

Martin Denholm

Related Articles at: www.smartprofitsreport.com:

Two Solid Election Year Investment Sectors: Healthcare and Construction

Financials Are Out. Let’s Go Drill For Oil Instead…

These Dividend Stocks Keep On Giving… Even As The Market Keeps Falling

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As Oil Prices Plunge, Airlines Could Rise

by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report

“Nowhere to run to, baby… nowhere to hide”

Lyrics from a 1965 hit song by Martha and the Vandellas - and lyrics that sum up today’s financial environment.

The markets are in a deleveraging, liquidation phase, with very few places to put your capital to work and feel comfortable about doing so.

Forced mutual fund selling, panic, and margin calls are all big reasons why most equity sectors are at, or near, their lows for the year. Leveraged hedge funds are selling anything, including commodities, to raise cash.

A Word On The Spread

In the last edition of “Sector Watch” on October 13, I wrote about the importance of the spread between the Nasdaq 100 and the S&P 500 and that if the markets were going to rally, the spread needed two closes above the regression line, which was at the 401 level.

On October 13, the spread did close above 401. On the following day, even though it then traded as high as 460 at the open, it closed the session at 366 and has traded lower since then, as the Nasdaq 100 went on to make new lows.

The reason I bring this up is to show you the importance of how to treat regression channels, trendlines, moving averages, and how it can help in your own trading. When using these technical tools as a confirming indicator or to even generate buy signals, it’s been my experience that you need confirmation in order to “validate” the move. That’s why I said we needed two closes above the regression line, not one, and by using this rule; it kept us out of trouble.

Let’s dig into this week’s specific sector…

Has The Grounded Airline Industry Finally Found A Bottom?

In this market, you may think there are no decent places to invest. While it’s true that with volatility rampant and risk is greatly increased at the moment, there are some sectors that are stronger than others.

For example, Airlines, Utilities, and Drugs haven’t made new lows recently and could instead be forming a bottom.

Of these three, the Airline Index (^XAL) has the best-looking chart.

Take a look at its weekly chart below. You’ll notice that it made its lows back in July but had enough relative strength to stay above that low in October when most of the other indexes were making new lows for the year.

Two Key Numbers

The long-term, weekly downtrend line and the 50-week moving average both currently sit around the $26.50 area, while the $28.22 figure represents the high back in September.

Although not shown on this chart, the 200-day moving average comes in at $24.05 - a level that was tested last Friday morning before the sellers pushed the index back down to $20.44 at the close.

If you’re a more aggressive investor, you could try the long side if the index manages two daily closes above the 200-day moving average ($24.05).

However, the safer play would be to wait for the index to trade above the September high at $28.22 (although be sure that it’s not just a gap higher at the open). Taking out a trendline, an important moving average, and an old high gives you a much better chance of being successful.

Keep Your Eyes On The Sticky Stuff

With oil prices having sunk from highs around $147 in July to the mid $60s today, that definitely bodes well for the airline industry.

It’s no coincidence that when crude oil peaked at $147 in July, it came just two days before ^XAL put in its low for the year.

One of the main reasons that the industry has rallied since then is because crude has fallen over 50% since that high. High fuel costs quickly eat into any transportation-based industry and the sector is currently breathing a sigh of relief.

At the same time, airlines have become extremely “creative” in trimming costs over the past year or two. From slapping baggage charges on passengers, to charging for pillows and seat assignments, and shutting down unprofitable routes, many moves are unpopular, but unfortunately quite necessary.

And now that crude oil is trading below $65, airlines now have the opportunity to at least partially hedge their fuel costs going forward - a luxury that most of them couldn’t capitalize on before.

The mass stock market liquidation may not be over, but keep an eye on the ^XAL. As long as it stays above its July lows when the selling is complete, it could be ready to run higher.

However, keep in mind that if you want to invest in this index or any individual airline stocks, the price of crude oil can have a big influence on how the airlines stocks trade. And right now, crude oil is oversold, so be cautious.

Catch you back here next time.

Jim

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India Wields Its Monetary Policy Axe… But Can The Country Stave Off Recession?

Friday, October 24, 2008; Issue #569
Guest Editorial by William Patalon III, Executive Editor, Money Morning & The Money Map Report

Editor’s Note: As the U.S. stock market continues to wreak havoc with investors’ portfolio and stress levels, you can bank on our friends at Money Morning taking a more global approach to investing. Earlier this week, Executive Editor William Patalon enlisted our very own Investment Director Karim Rahemtulla’s expertise for this article on the Indian economy and stock market. The Money Morning team believes the world is in the middle of the greatest investing boom in 60 years and is always searching for the most explosive opportunities in the U.S. and around the world. So when you’ve finished reading the article, be sure to check in with the rest of their insights here.

Martin Denholm, Managing Editor, Smart Profits Report

India’s Central Bank In Recession-Busting Model

With the Reserve Bank of India’s surprise interest rate cut on Monday, this may actually be the first time ever that India is ahead of the monetary policy curve.

That’s according to Karim Rahemtulla, speaking in the wake of the Reserve Bank of India cutting its overnight lending rate from 9% to 8%, as the country makes a strong move to avert a recession.

The “surprise move” came days before a regularly scheduled meeting of its policy board and after the central bank reduced the cash reserve ratio by 2.5 percentage points to 6.5% - retroactive to October 11.

The so-called “repurchase rate” is the discount rate at which India’s central bank lends money to commercial banks in order to inject liquidity into the market

“By lowering rates, and thereby liquefying the system and offering stimulus to deflect slowing growth, India may be ahead of the curve for the first time in making the correct monetary policy decisions to prevent a recession which it cannot afford,” says Karim.

Without doubt, this is a country that is extremely eager to sustain its investment growth…

A $1 Trillion Market And The Fastest GDP Growth In 60 Years

In late May 2007, the Bombay stock exchange became the third emerging stock market (after China and Russia) to surpass $1 trillion in market value - a surge helped at the time by the nation’s fastest GDP growth in six decades, a flood of foreign investment and a strengthening rupee. On the day the index achieved that milestone, the 30-stock Sensex, closed at 14,508.21 - 1% below its then-record high.

As Karim states, “India has been one of the [world's] largest recipients of foreign direct investment, which accounted for the boom in the stock market over the past five years.

That was then - and this is now. And India’s rate cut this week demonstrates that…

India Feeling The Ripple Affect From The Credit Collapse

India clearly fears that the ongoing turmoil in the credit markets remains a threat - one that could plunge much of the global economy into a recession.

“A 100-basis-point cut is an indirect admission that not all is ‘hunky dory’ with the India growth story,” Nandkumar Surti, chief financial officer at JPMorgan Asset Management India Pvt. Bank in Mumbai, told Bloomberg. “One way to look at it is that the global problem has begun to affect us.”

Fluctuations in India’s bond yields this month were the widest in more than five years as the central bank took steps to ease a liquidity crunch. Ironically, just one day after the central bank cut rates for the first time in four years, an employee strike at the Reserve Bank of India shut down bond trading in Mumbai, leaving many traders unable to bet on additional interest rate reductions. About 25,000 employees of the central bank walked off their jobs to demand higher pensions.

And it’s not just India feeling the pinch…

This Crisis Is Global

As both JPMorgan Chase & Co. (JPM) and UBS AG (UBS) said the world economy is sliding into its first recession since 2001, evidence of the slowdown is apparent with China’s GDP growth slumping to a five-year low in last quarter. And in addition to India, Vietnam also reduced borrowing costs this week.

The near-collapse of the banking systems in both the United States and Europe this month prompted the International Monetary Fund (IMF) to throttle its worldwide GDP growth forecast for 2009 from an earlier estimate of 3.9% all the way back to 3% - a point the IMF itself has labeled as the dividing line between global expansion and a global recession.

After growing at an estimated rate of 9.3% in 2007, the IMF says India’s GDP growth rate may slow to 7.9% this year and all the way down to 6.9% next year.

The projection comes as the Indian stock market has lost over half its value this year, the rupee has fallen to new lows, and cash flow problems cripple banks.

On the bright side, India’s key wholesale price inflation number slowed more than economists expected to 11.4% in the week through to October 4 - a four-month low.

“We expect a further reduction in wholesale price inflation in the next two months,” Indian Prime Minister Manmohan Singh told lawmakers this week. “Nevertheless, we must be prepared for a temporary slowdown in the Indian economy.

So what next?

Despite The Downturn, India Is Upbeat

India’s commerce minister, Kamal Nath, told the BBC that he’s confident India can remain a strong force on the economic stage, arguing that the country’s growth rate was “not as yet” being threatened. Unlike its U.S. counterparts, none of India’s banks have gone bust due to the Asian country’s “stricter norms,” Nath assured.

Also key: Foreign-direct investment remains strong, and export growth soared 31% in September.

However, Karim argues that export growth could pose a problem: “India’s economy, while insulated somewhat from the global crisis because of its minimal reliance on outside trade, may still suffer from the current malaise because of its growing export sector. The rate cuts, which will likely be followed by more cuts, are being made to ensure India’s competitiveness by allowing rupee depreciation, which helps its strong outsourcing and tech sectors.”

That, in turn, will directly benefit such companies as Infosys Technologies Ltd. (Nasdaq: INFY). Wipro Ltd. (NYSE: WIT), Tata Motors Ltd. (NYSE: TTM) and global IT-services provider Satyam Computer (NYSE: SAY), Karim believes. Tata Motors recently gained global fame when it introduced a fully functional $2,500 car called the “Nano” for the India market.

India’s Finance Minister Palaniappan Chidambaram has asked parliament for approval to spend an additional $49 billion (2.4 trillion rupees) on rural jobs, food and oil subsidies in the year ending March 31. The aim is to provide a further boost to the economy, which has grown at a record 8.8% annual clip since 2004.

The China Equation

India’s leadership “must have been worried about global growth, big economies and [the fact that other key economies in] the region [are] slowing,” Sailesh Jha, senior regional economist at Barclays Capital (NYSE: BCS) in Singapore, told Bloomberg this week, referring to the GDP report for China: Hit “The BRICs” for Superior Profits?

Although central banks in the U.S. and Europe have pared interest rates to stave off a recession, only India and China among the so-called “BRIC” economies have joined global policymakers in that battle. Russia lowered its reserve requirement twice in a month, while Brazil reduced the measure four times in three weeks.

Back on October 8, easing inflationary pressures in China enabled its central bank to pare interest rates for the second time in three weeks. It reduced the one-year lending rate from 7.2% to 6.93% on the same day that the U.S. Federal Reserve, European Central Bank and three others lowered rates in unprecedented and co-coordinated worldwide action. China also reduced the proportion of deposits that lenders must set aside as reserves by 0.5 percentage points.

China’s economy, the biggest contributor to global growth, zoomed along at a 9% clip in the third quarter.

The Outlook For India

In a recent report, the Macquarie Research unit of Macquarie Group Ltd. said that Indian real-estate developers are facing a shortage of funds, which may slow demand for steel, cement and transportation products and services.

“The capital crunch has hit the real estate sector very hard,” Macquarie analysts Unmesh Sharma and Bharat Rathi said. “We believe the tightness will continue for a few more months, given the difficulty in raising capital through bank debt, equity markets and (more recently) private equity.”

The decline in demand is already showing in India. The nation’s output at factories, utilities and mines rose 1.3% in August from a year earlier, after a revised 7.4% gain in July, as rising borrowing costs have dampened demand from consumers.

Rajeev Malik, a regional economist with the Macquarie Group in Singapore, recently said that the “downside risks to India’s growth have increased, while the upside risks to inflation have receded. We expect inflation to continue improving, thereby facilitating a shift in the RBI’s monetary stance.”

Best regards,

William Patalon, III

Related Articles at: www.smartprofitsreport.com:

How To Handle The Stock Market’s Current Turmoil

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Dividend Stocks: A Great Investment Strategy For Bad Times

Tuesday, October 21, 2008: Issue #568

by Martin Denholm, Managing Editor, Smart Profits Report

 

You can get more than one sound investment strategy from watching - or playing - sports.

One of the truest rules is also one of the most fundamental: If you want to be successful through the bad times as well as the good, it starts with playing solid defense.

Sadly, this is a concept lost on my favorite English soccer team, Everton, who’ve shipped a league-high 18 goals in just eight games this season. It’s also lost on the Denver Broncos, whose defense has more holes than the Old Course at St. Andrews and who got walloped 41-7 by New England on Monday night.

And, it seems to be lost on the majority of investors right now as well.

When it comes to any kind of  investing strategy, the ability to play solid defense can ease you through turbulent times much better than most ordinary investors. And the concept here is simple: Defensive investing means having some strong, dividend stocks in your portfolio.

A 72-Year History Of Top Performance

The two main concepts that dominate the stock market climate are fear and greed. While they’re always prevalent, investors with a strong investment strategy know better than to base their decisions on fluctuating sentiments like these.

Instead, it’s better to look for long-term drivers - like earnings growth, cash, and the ability of companies to pay dividends to their shareholders.

History shows that the latter is a particularly smart way to go. From 1935 to 2007, more than 40% of the S&P 500’s total return came from reinvested dividends.

The beauty of dividend stocks is that they work well in both rising and falling markets. SensibleStocks.com reports that during the bull market of 1982 to 2000, dividend stocks actually outperformed non-dividend payers by a considerable margin, despite the underlying share price appreciation.

And  during the bad times involving the volatile, sinking markets we’re experiencing now, it’s comforting to know that you’ve still got a source of income throughout the madness. You’re essentially being paid for your patience, rather than selling off like everyone else.

Let’s look at some more benefits…

3 Reasons To Invest In Dividend Stocks

Dividend stocks offer more than one compelling reason to invite them into your portfolio. Here are the three best ones:

• Lowers Cost: When you’re picking up a regular dividend payment per share every quarter, over time, it reduces the price you originally paid for the shares. It’s essentially like buying a house, then renting it out to offset the payment and pick up income, while the underlying asset appreciates at the same time. And of course, since the Jobs Growth and Tax Relief Reconciliation Act of 2003, investors have paid lower taxes on dividends.
• Provides Stability During Downturns: When the broader stock market is under pressure and share prices are falling,  dividend stocks are often considered one of the “safer haven” investment strategies out there, since investors are still receiving income. In turn, it’s good PR for a company, with the stock attracting more investors and the share price potentially rising as a result. Pay attention to the level of insider ownership of a stock here. This is not a hard and fast rule, but if insiders hold a big chunk of the company themselves, they’re less likely to be reckless with its money through overly ambitious projects or ill-advised buyouts, and may well pay greater attention to shareholder interests and dividends.
• Keeps Management In Line: When an executive team is dishing money back to its shareholders, not only does it show sound business acumen to be able to do that in the first place, but it also keeps them honest. Knowing that they have to make good on didvidend payments on a regular schedule reduces the chances that they’ll fritter your money away on wasteful projects. And as we’ve come to learn in a particularly painful fashion, that’s a very good thing.

Of course, there are pitfalls, too. So before I get to a couple of investment options for you, let’s look at those…

Dividend Stock Drawbacks

Dividend Stocks do have their drawbacks of course, as with everything else in life, so it’s important to look at every angle of a company before you jump into any particular company just because they offer them.

• Dividend Reduction Or Suspension: At a time when obtaining credit is tighter than ever before, it’s much more likely that companies will reduce or suspend their dividend payments. This is usually a last resort, as it signals to the world that the company is having trouble raising cash, which can, in turn, severely impact its share price.
• Twice The Tax… And Higher In 2010? Naturally, the IRS needs to grab its piece of the pie - and when it comes to payments from dividend stocks, it’s a double-whammy. First, it claims the regular corporation taxes from the company. Then, when the company passes what’s left down to its shareholders, those investors are then taxed on what they receive. In addition, the Jobs Growth and Tax Relief Reconciliation Act that I mentioned a moment ago expires in 2010, so we may see dividend taxes rise when it does.
• Lack Of Investment Options: Some argue that while companies should be praised for rewarding shareholder loyalty through dividends, it may also mean that it can’t find other investment options, or projects that would accelerate the company’s growth.

And beware companies that offer sky-high dividend yields. It could merely be a crafty way to mask bigger problems. Automakers like General Motors (NYSE: GM) and Ford (NYSE: F) are good examples, as are some of the beaten-up financial stocks like Citigroup (NYSE: C).

In addition, as share prices drop, dividend yields rise, which can be a false dawn. Bottom line: If a company isn’t growing its earnings or its cash-flow has shrunk, it may well be a bad sign. Make sure you do your regular due diligence.

Where To Look For The Best Dividend Stocks

Right now, two of the best sectors to find dividend stocks are Consumer Staples and Telecom.

In the upcoming November Xcelerated Profits Report issue, my colleague Jim Stanton is recommending one of the best companies within the Consumer Staples sector, which pays a dividend. One of the advantages that this sector has during a downturn or recession is that it continues to generate revenue through essential repeat business. After all, consumers always need everyday household items.

(As an aside, you can get your hands on Jim’s specific Consumer Staples recommendation by signing up for the Xcelerated Profits Report. Just click this link for more details).

In the telecom sector, firms like Verizon (NYSE: VZ) and AT & T (NYSE: T) boast some rock-solid financials, allowing them to pay a 6.8% dividend ($1.84 per share annually) and 6.3% ($1.60 per share annually).

In the current climate, though, if you don’t want to take the chance on individual companies, you can always diversify and lower your risk by buying ETFs that hold companies offering dividend stock choices. Take a look at…

SPDR S&P Dividend ETF (SDY: AMEX): Holding stocks like Bank of America (NYSE: BAC), Pfizer (NYSE: PFE), Fifth Third Bancorp (Nasdaq: FITB) and Consolidated Edison Inc (NYSE: ED), the fund tracks the price and yield performance of stocks in the S&P High Dividend Aristocrats index.

PowerShares High Yield Dividend Achievers (AMEX: PEY): This fund’s results try to correspond to the Dividend Achievers 50 Index. Around 80% of its holdings are in companies that have consistently raised their dividends. Its holdings include Bank of America, Keycorp (NYSE: KEY), American Capital Strategies (Nasdaq: ACAS), BB&T Corp (NYSE: BBT) and Comerica (NYSE: CMA).

Best regards,

Martin Denholm

Related Articles at: www.smartprofitsreport.com:

How To Box Clever Against A Hostile Market And Score “Knockout” Yields Of 21.5%

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Bear Attack Spares None As Mauling Continues

Monday, October 20, 2008
by Lee Lowell, Futures Options & Commodities Specialist, Smart Profits Report

Welcome to another roundup of the latest action in the commodities world. The tumultuous ride that began months ago continues unabated, so let’s get right to it…

Over the past couple of weeks, we’ve seen the wild stock market gyrations continue, with moves of over 700 points seen on more than one occasion for the Dow Industrials and levels that we haven’t seen since March 2003.

We’ve since bounced off those lows, but don’t expect the uncertainty surrounding the economy to go away any time soon. We could see the current volatility continue for the next few months until the government’s interventions take more effect and can be judged better.

This backdrop explains why there’s been no let up in the commodities selloff. Nothing is safe in this panic, with every major commodity, including the usually safe metals, falling victim to the downturn.

Oil Barrels Down Again

We hit a major milestone in the energy sector with the price of oil dipping under $70/barrel for the first time since roughly August 2007.

Just last week, the front-month crude oil futures contract (November contract) hit a low of $68.92 - $80 lower than its high price of $148.60 a barrel from July 11 this year. That corresponds to a change in equity of $80,000 on a single contract!

There’s been some talk that OPEC will try to reduce supply at its next scheduled meeting, which is causing a temporary pop back in the market. Oil futures have since bounced to its current level of $75.50 a barrel.

Look For Natural Gas To Hit Support Levels

In other energy news, natural gas continues its seemingly never-ending slide, which started back in July.

If you thought the move in crude oil was big, then feast your bearish eyes on natural gas.  The front-month futures contract (November) has lost a staggering 8500 points, which translates into a change in equity of $85,000 on one futures contract.

Currently, natural gas futures sit at $6.820/mmbtu and have fallen as low as $6.500/mmbtu just last week, a drop from its July high of $14.000/mmbtu. Long-term value levels are getting very close for natural gas, since $5.000 is historically a good support area to keep an eye on.

Precious Metals Aren’t Doing What They Should

You’d think that metals would be doing well right now, especially gold. But if you’re betting on the market acting rationally right now, you’re likely to be disappointed for the time being.

Up until about two weeks ago, it looked as though gold & silver could be the only commodities that were actually bucking the bearish trend. That was until last week when both metals took it on the chin and fell hard. Silver dropped to new yearly lows, with gold almost matching its yearly low.

Silver currently sits at $9.70 an ounce, having touched a low of just above $9 an ounce last week. This is a drop of roughly $12.50 from its high point of $21.55, which it hit in March this year. That’s an equity move of over $62,000 per contract.

For a little while there, gold looked like it was going to come through and be the last savior for the metals group by hitting a high price of $936/ounce. It even had experts betting on whether it could launch itself to $1000/ounce.

While that is still a possibility, immediate hopes were squashed when the Dow went on its sell-off, causing gold to get knocked down to $772/ounce.  That was a quick $160/ounce move lower for gold. 

As Bear Rages, Grains and Softs Get Devoured

The rest of the commodities sector has faced the same bear attack. All the grains (corn, wheat, soybeans) have made new yearly lows, as well as the softs (coffee, sugar, cocoa, cotton & orange juice).

In fact, orange juice has retraced all the way back down to November 2004 levels, which are areas last seen just before the four devastating hurricanes ripped through the state of Florida.

We will see bottoms and value levels reached at some point, maybe sooner than we think.  All these markets have come down a long way from their peaks. But remember, if you’re going to play these markets, stick to limited-risk option strategies.

Lee Lowell

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You Can Profit In A Miserable Market Like This - Here’s How…

Thursday, October 16, 2008
by Martin Denholm, Managing Editor, Smart Profits Report

“The type of man she hated… was the type she wanted.”

 That’s a tagline from the 1946 classic film noir movie The Big Sleep, starring Humphrey Bogart and Lauren Bacall.

As a former film student at school, the movie popped into my head while I was on my way to the office this morning, as I was thinking of metaphors to sum up the current state of the stock market. And since the title of the film is a euphemism for “death,” it seems appropriate, given that the recent wild fluctuations have put many investors’ portfolios to sleep - and outright killed many others.

I’m going to use a little poetic license here and apply that tagline to investing instead: “The type of market investors hated… was the type they wanted.”

Yes, that’s right. Far from joining the masses in a frenzy of fear and panic, let’s take a “smarter” approach to this situation and actually use the downward trend for us, not against us. There are a few quick and simple strategies you can employ in order to fight back against this meltdown…

That Dreaded “R” Word Is Back Again

“The market is very worried about a severe international economic downturn.” That’s the verdict of commodity strategist David Moore at the Commonwealth Bank of Australia.

He was speaking the day after the Dow endured its second-worst one-day slump in history (733 points), with stocks losing a staggering $1.1 trillion in value. The index has recorded triple-digit movement on 20 of the past 23 days and posted just one positive day this month. The Associated Press says investors have lost $8.3 trillion from 401(k) plans, pension funds, college savings accounts, and other investments.

Sure, September’s consumer price inflation reading came in flat, compared with August. But it doesn’t disguise the fact that U.S. employers are shedding jobs en masse, while retail sales dropped 1.2% in September. On the bright side, though, this has led to oil prices dropping by more than 50% since July’s $147 record high. The black goo currently trades at a 14-month low around $70 a barrel amid speculation that consumption will drop as consumers cut back and a global economic recession takes hold.

While there’s nothing you or I can do about a recession, there are steps we can take to combat the stock market’s nosedive. Let me take you back to my colleague Marc Lichtenfeld’s “Five-Point Bear Plan” that he published here back in August 2007. What was true then is even truer today…

Your Five-Point Bear Plan

1. Sell Short: This is when you sell a stock before you own it and buy it back later. The premise is that you expect to sell high and buy low, in that order. But you need to borrow shares first in order to be able to sell them. And of course, the risk is that a stock can go infinitely higher. Your broker must also approve you before you can sell short.
2. Buy Put Options: You can buy put options on a stock or index that you expect to decline. This gives you the right to sell the asset to the seller of the option at a specific price in a pre-specified time. To do so, you must buy a certain number of options contracts - with 100 underlying shares equivalent to one contract. For example, if you think that American Express (NYSE: AXP) is going to decline, you can buy the November $20 puts. This gives you the right to sell the stock at $20 anytime before the third Friday in November, no matter where the stock is trading. If the stock heads lower, your put options should increase in value. Conversely, if the stock is trading above $20, your put expires worthless.
3. Sell Call Options: If you own shares that you don’t want to sell, but think the price may fall, you can sell call options against them. This gives the buyer the right to “call away” your shares at a specific price. Let’s say you own shares of Apple (Nasdaq: AAPL). You can sell the January $90 calls for $19, meaning the buyer has the right to buy your shares for $90 any time before the third Friday in January. No matter if AAPL is trading at $100 at that time, you’ll still be forced to sell at $90. However, if the stock is below $90, the option expires worthless and you keep the $19. You must be approved to trade options if you want to do this.
4. Bear Mutual Funds: There are several mutual funds that seek to profit when markets go down. They include the Prudent Bear Fund (BEARX), ProFunds Bear (BRPIX) and Rydex Inverse S&P 500 Strategy (RYURX). Be sure to read their prospectuses and holdings carefully before you take a position. You’ll also be required to invest a minimum amount and pay annual maintenance fees.
5. Bear ETFs: If you don’t want to short stocks or indexes, don’t have approval to trade options, or don’t want to pay the higher fees associated with funds, you can buy ETFs (Exchange-Traded Funds) that short various indexes instead. For example, the Short QQQ ProShares (AMEX: PSQ) seeks returns that correspond to the inverse of the Nasdaq 100. In other words, if the Nasdaq 100 declines 10%, PSQ should be up roughly 10%. There are also various bear ETFs, including sector specific and leveraged funds such as the UltraShort Oil & Gas ProShares (AMEX: DUG). This fund seeks returns that equal twice the inverse performance of the Dow Jones Oil and Gas Index.

(Please note: The companies/funds mentioned above are not actual recommendations, just examples).

Buff Up In A Rough Market

The bottom line here is that you shouldn’t just run off with the crowd and sell off, because that’s what they’re doing. Take a page out of Warren Buffett’s book instead.

Granted, the guy can afford to lose a few dollars here and there, but his investment philosophy is the important thing: He doesn’t cave into uncertainty, fear, or panic. He just rides out the market’s fluctuations and, in fact, rather than selling off, he uses downtimes as an opportunity to accumulate his positions for a discount. 

And that’s what has helped make him one of the world’s most successful investors.

By coincidence, Marc just e-mailed me the first part of his next Xcelerated Profits Report article, which ties into this perfectly. He says:

“Market slides like the one we’re experiencing give us an opportunity to get into great stocks at prices we could only have dreamed of just a few weeks earlier. Yes, it’s tough to buy while everyone is selling, but history shows us the most money is made by buying into a panic.

“I’m not suggesting we just blindly throw our money at the market. But the selloff is providing us with an opportunity to get involved with biotech - and I can’t think of a sector I’d rather be in than biotech right now. No matter what the economy has in store for us, people are going to continue to take the medicines that fight their illnesses. And this month, I’ve got two recommendations that have me salivating…”

Out of fairness to our paying subscribers, I can’t reveal those picks to you here. But if you act fast, you can get yourself on our list in time to receive them in the upcoming issue. It costs just $49.50 for a 12-month subscription and each issue is guaranteed to contain not only specific recommendations, but also the sophisticated, professional strategies that will elevate you above the crowd and allow you to make more money more safely and in a faster time. Check it out here.

Best regards,

Martin Denholm 

Related Articles at: www.smartprofitsreport.com:

Bear Market Investing: Don’t Get Burned By Bears… Here’s Your Five Point Plan

The Best Stocks To Invest In During A Bear Market

3 Steps You Can Take To Combat The Current Stock Market Collapse

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You Can Still Profit In A Bear Market Like This

Thursday, October 16, 2008: Issue #567

by Martin Denholm, Managing Editor, Smart Profits Report

 

A bear market might actually be the best thing that’s happened to your portfolio. If you can’t quite wrap your mind around that concept, just read on…

“The type of man she hated… was the type she wanted.”

That’s a tagline from the 1946 classic film noir movie The Big Sleep, starring Humphrey Bogart and Lauren Bacall.

As a former film student at school, the movie popped into my head while I was on my way to the office this morning, as I was thinking of metaphors to sum up the stubborn bear market we’ve found ourselves in. And since the title of the film is a euphemism for “death,” it seems appropriate, given that the recent wild fluctuations have put many investors’ portfolios to sleep - and outright killed many others.

I’m going to use a little poetic license here and apply that tagline to investing instead: “The type of market investors hated… was the type they wanted.”

Yes, that’s right. Far from joining the masses in a frenzy of fear and panic, let’s take a “smarter” approach to this situation and actually use the bear market for us, not against us. There are a few quick and simple strategies you can employ in order to fight back against this meltdown…

This Bear Market Is Bringing Back The Dreaded “R” Word

We’re not the only ones worrying about where the current bear market is dragging our already mauled portfolios and economies.

“The market is very worried about a severe international economic downturn.” That’s the verdict of commodity strategist David Moore at the Commonwealth Bank of Australia.

He was speaking the day after the Dow endured its second-worst one-day slump in history (733 points), with stocks losing a staggering $1.1 trillion in value. The index has recorded triple-digit movement on 20 of the past 23 days and posted just one positive day this month. The Associated Press says investors have lost $8.3 trillion from 401(k) plans, pension funds, college savings accounts, and other investments.

Sure, September’s consumer price inflation reading came in flat, compared with August. But it doesn’t disguise the fact that U.S. employers are shedding jobs en masse, while retail sales dropped 1.2% in September. On the bright side, though, this has led to oil prices dropping by more than 50% since July’s $147 record high. The black goo currently trades at a 14-month low around $70 a barrel amid speculation that consumption will drop as consumers cut back and a global economic recession takes hold.

While there’s nothing you or I can do about a recession, there are steps we can take to combat the stock market’s nosedive. Let me take you back to my colleague Marc Lichtenfeld’s 5-Point Bear Market Plan that he published here back in August 2007. What was true then is even truer today…

Your 5-Point Bear Market Plan

1. Sell Short: This is when you sell a stock before you own it and buy it back later. The premise is that you expect to sell high and buy low, in that order. But you need to borrow shares first in order to be able to sell them. And of course, the risk is that a stock can go infinitely higher. Your broker must also approve you before you can sell short.
2. Buy Put Options: You can buy put options on a stock or index that you expect to decline. This gives you the right to sell the asset to the seller of the option at a specific price in a pre-specified time. To do so, you must buy a certain number of options contracts - with 100 underlying shares equivalent to one contract. For example, if you think that American Express (NYSE: AXP) is going to decline, you can buy the November $20 puts. This gives you the right to sell the stock at $20 anytime before the third Friday in November, no matter where the stock is trading. If the stock heads lower, your put options should increase in value. Conversely, if the stock is trading above $20, your put expires worthless.
3. Sell Call Options: If you own shares that you don’t want to sell, but think the price may fall, you can sell call options against them. This gives the buyer the right to “call away” your shares at a specific price. Let’s say you own shares of Apple (Nasdaq: AAPL). You can sell the January $90 calls for $19, meaning the buyer has the right to buy your shares for $90 any time before the third Friday in January. No matter if AAPL is trading at $100 at that time, you’ll still be forced to sell at $90. However, if the stock is below $90, the option expires worthless and you keep the $19. You must be approved to trade options if you want to do this.
4. Bear Market Mutual Funds: There are several mutual funds that seek to profit from a bear market. They include the Prudent Bear Fund (BEARX), ProFunds Bear (BRPIX) and Rydex Inverse S&P 500 Strategy (RYURX). Be sure to read their prospectuses and holdings carefully before you take a position. You’ll also be required to invest a minimum amount and pay annual maintenance fees.
5. Bear Market ETFs: If you don’t want to short stocks or indexes, don’t have approval to trade options, or don’t want to pay the higher fees associated with funds, you can buy ETFs (Exchange-Traded Funds) that short various indexes instead. For example, the Short QQQ ProShares (AMEX: PSQ) seeks returns that correspond to the inverse of the Nasdaq 100. In other words, if the Nasdaq 100 declines 10%, PSQ should be up roughly 10%. There are also various bear ETFs, including sector specific and leveraged funds such as the UltraShort Oil & Gas ProShares (AMEX: DUG). This fund seeks returns that equal twice the inverse performance of the Dow Jones Oil and Gas Index.

(Please note: The companies/funds mentioned above are not actual recommendations, just examples).

Buff Up In A Bear Market

Bear Market rule of thumb: Don’t just run off with the crowd and sell off, because that’s what they’re doing. Take a page out of Warren Buffett’s book instead.

Granted, the guy can afford to lose a few dollars here and there, but his investment philosophy is the important thing: He doesn’t cave into uncertainty, fear, or panic. He just rides out the market’s fluctuations and, in fact, rather than selling off, he uses downtimes as an opportunity to accumulate his positions for a discount.

And that’s what has helped make him one of the world’s most successful investors.

By coincidence, Marc just e-mailed me the first part of his next Xcelerated Profits Report article, which ties into this perfectly. He says:

“Market slides like the one we’re experiencing give us an opportunity to get into great stocks at prices we could only have dreamed of just a few weeks earlier. Yes, it’s tough to buy while everyone is selling, but history shows us the most money is made by buying into a panic.

“I’m not suggesting we just blindly throw our money at the market. But the selloff is providing us with an opportunity to get involved with biotech - and I can’t think of a sector I’d rather be in than biotech right now. No matter what the economy has in store for us, people are going to continue to take the medicines that fight their illnesses. And this month, I’ve got two recommendations that have me salivating…”

Out of fairness to our paying subscribers, I can’t reveal those picks to you here. But if you act fast, you can get yourself on our list in time to receive them in the upcoming issue. It costs just $49 for a 12-month subscription and each issue is guaranteed to contain not only specific recommendations, but also the sophisticated, professional strategies that will elevate you above the crowd and allow you to make more money, more safely, more quickly.

Check it out here.

Best regards,

Martin Denholm

Related Articles at: www.smartprofitsreport.com:

Bear Market Investing: Don’t Get Burned By Bears… Here’s Your Five Point Plan

The Best Stocks To Invest In During A Bear Market

3 Steps You Can Take To Combat The Current Stock Market Collapse

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Gold Is Ready To Run Again… Make Sure You Watch This Indicator And Get On Board

Friday, October 14, 2008: Issue #566

by Karim Rahemtulla, Investment Director, Smart Profits Report

Money… money… money.

Before you think I’ve gone off on an Abba kick, hear me out.

Thanks to the world’s central banks and their efforts to pump the global financial system with a ton of cash, the world is now awash with greenbacks, euros, pounds, and yen.

And I’m not talking billions here. I’m talking about trillions.

There’s no doubt that the U.S. economy needed to be bailed out of the mess it created for itself - and then spilled over into the world’s other economies, too. But this isn’t just a spare bit of cash stashed away for a rainy day - the numbers are staggering.

And the reason for this massive cash injection is simple: We’ve seen economic disasters before, just not on this scale.

Remember the good old days when Mexico failed, or Argentina defaulted, or even when Russia caved in?

Back then, in order to bail out our Second and Third World buddies, we were talking a few billion here, a few billion there… maybe one hundred billion at the most.

But times have changed - and it’s time for a different lesson in mathematics, as we get to see what happens when a First World (and that’s being generous these days) nation blows up spectacularly. It takes trillions.

And as we’re finding out, it’s good to have friends in low places.

Gold Needs Some Red Bull

Mark my words: The market did not capitulate. The G-7 did.

So if we’re looking for a silver lining in this mess, it’s that we still have friends. And all those times we bailed out Europe and Asia in the face of deafening criticism has proved to be money very well spent. They have now come to our aid - and indirectly, their own, too.

This is exactly why the dollar hasn’t collapsed. When all currencies inflate in unison, what’s left to get smashed?

But the most bizarre thing among the current situation is that gold - the financial world’s tried-and-tested safe haven for troubled times - is acting like it couldn’t care less about what’s happening.

It’s astounding. Either this is the single best opportunity to buy gold and gold stocks, or we may as well put the “gold is a great safe haven” story to rest permanently. One would think that investing in gold would be a no-brainer at the present time, but it’s been tricky, to say the least.

Because of the massive disconnect between gold prices and gold share prices, I’ve been accumulating gold shares in recent weeks. And so far, the tactic has failed.

So why it is that the one time in modern history that the entire global financial system is on the verge of meltdown, gold can’t even break $300? (That’s $300 in inflation-adjusted terms).

Gold Appears To Be Kissing Goodbye To Logic

Heck, gold was really even higher by a factor of three in the early 1980s than it is today.

Logically, gold should be trading at $3,000 an ounce today. But sometimes, logic doesn’t matter one little bit - and the metal just isn’t doing that right now. Nevertheless, hope springs eternal for gold bugs - and this time, I think they’ll be right on the money.

Amid all the fear and panic, this market will eventually stabilize again and we’ll go through a harsh recessionary cycle. After all, business is business. But the long-term outlook for gold just got really, really shiny.

Many people were surprised to see the stock market take off on Monday. But the jump higher - over 10% across the board - was predictable. In fact, not only did I touch on it last week, but in one of my trading services, we even took a bullish position on the Nasdaq a few days ago.

Don’t get carried away, though… we should retest the recent lows again in the coming days or weeks.

However, if that holds, we could be in for a sustained rally.

If you need an indicator, just take a look at the CBOE Volatility Index (VIX), which (as the name suggests) measures market volatility and fear. Having hit all-time highs over 70 at the height of the crash, it has since lost 20%. This is a sign that stability is returning.

Nothing Says “Happy Holidays!” Like Gold

Remember… the market always anticipates the future. So while the economy may be heading south for a while, and the Grinch will doubtlessly be making multiple visits this holiday season, the market has already discounted this to some extent.

If you need any proof, just take a look at any well-diversified portfolio. Mark my words: It will be down over 20%, and probably more.

But with gold, Christmas has come early. You’ll know what to expect when the market retests its low - and if you see the VIX jump to over 65, let that gold bug roam free! If you’re looking for a place to put some of your overvalued cash right now, consider buying some shares of your favorite miner - it’s on sale.
Karim Rahemtulla

Related Articles at: www.smartprofitsreport.com:

Stock Market Massacre Trickles Down To Commodities… But These Two Are Holding Up Well

The Best Hedge Against Market Woes… And The Best Way To Profit From It

Let The “Waves” Guide You Towards Profits On Oil, Natural Gas, & Gold

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Bear Markets 101: Where This Grizzly Market Is Headed Next

by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report

Last Friday’s rollercoaster action, with the Dow Industrials swinging wildly from negative to positive, and back down again to end the day down 128 points, capped off one of the worst weeks in U.S. stock market history.

That gave the blue chips an 8-day loss of just under 2,400 - or 22.1%. To put it in perspective, the S&P 500 - the broader indicator that market pros prefer to use as a gauge - posted its worst weekly performance since 1933.

Ouch!

So where the heck do we go from here?

A Brief Bear History

Both the S&P 500 and the Dow have dropped over 40% since making new all-time highs last October. Below, you can see a recap of S&P bear markets since 1970. Because it’s fallen 46% from its peak this time around, it easily takes third place for worst recent history performance.

  

Out of the seven, the longest bear market was the March 2000 bear market, which lasted a total of 30 months. In contrast, the shortest only made it 3 months.

But the odds are against any shorter trends, since only three of the above-listed bear markets lasted 3 to 3½ months. The other four made it to the 18-month point or longer.

One of the more interesting points to note is that over half of them ended in the month of October. Is this significant? Only time will tell this time around.

Up Close And Personal With Today’s Bear

In celebrating its one-year anniversary recently, this bear market has long outlasted the three shorter ones. And in that time span, there hasn’t been a single sector spared.

A rollercoaster ride worthy of any major amusement park, for sure. But kid-friendly, this one ain’t. There have been a couple of days over the past two weeks when it appeared the markets had made a climatic low, only to see the sellers regain control later on in the afternoon.

Last Friday, was different though…

• From high to low, the Dow made a 1,000-point swing.
• The equity put/call ratio closed over 100% for the second day in a row.
• The Volatility Index (^VIX) - commonly referred to as the fear index - reached a record high level of 76.94.
• In addition, the Dow Transports, Nasdaq Composite, and all the smaller-cap indexes closed higher for the day, with the Russell 2000 closing more than 4.5% higher.

This type of action is usually associated with at least a short-term low and since we’re in the month of October, the odds of this occurring are raised a bit.

Volatility has raced to such highs recently that it will take a substantial rally in order to trigger daily buy signals. And there are a couple of indexes that could tip us off that the indexes bottomed out last week.

The Charts Will Show Us Where The Market Is Headed Next

One of the numbers I always keep a close eye on is the point spread between the Nasdaq 100 and S&P 500. That’s because during bull markets, the Nasdaq 100 usually outperforms the S&P 500 (on a point basis) - something that began happening last week. Below is a daily spread chart of the Nasdaq 100 minus the S&P 500, which includes last Friday.

  

The high point on the chart was the last swing high for both indexes, which occurred in the middle of August. As you can see, the spread dropped as these indexes sold off, losing 365 points in the process.

Despite all the indexes hitting their recent lows last Friday, the spread began improving after Wednesday’s open and closed higher for the last three days of the week.

I’ve drawn a regression channel from the August highs, with the upper band hovering around the 400 level. The high on Friday, October 3, was 400.89, so a couple of closes above 401 would be a positive sign for the indexes.

If you don’t have a chart program that can generate spread charts, you can do the calculation after the markets close. Simply subtract the cash value of the S&P 500 from the cash value of Nasdaq 100.

If the markets turn higher and you want to trade this spread, the ratio is 2.85:1 if using the ETFs that represent the S&P 500 and Nasdaq 100 respectively - the SPDR Trust (AMEX: SPY) and PowerShares QQQ Trust (Nasdaq: QQQQ).

That means for every SPY share you short; you’d have to buy 2.85 shares of QQQQ. For e-mini traders, you’d buy five Nasdaq 100 contracts and simultaneously sell short two S&P contracts.

That’s all for this edition.

Jim

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