What Now?

If you recall in last week's article I indicated that I moved all my 401-k out of mutual funds. This even though the monthly arrow remains green. If you missed that, please go back and read it to be enlightened as to the reasons why before continuing. This week the market did show some strength but my analysis indicates indecision right now. Half of what I look at suggests there could be a rally over the next week or two and the other half indicates weakness. My experience has taught me that when there's indecision, it's best to stand aside and wait for the market to prove itself. Each week I'll monitor the market and look for all factors to line up. That will be the best time to get back in, when the probabilities favor an extended rally.

FOR YOUR EDUCATION...This week I thought I would address the question of whether or not it's possible to make better returns than what money market funds have to offer during protracted bear markets, the likes of which we witnessed from October 2001 - March 2003 and November 2007 - March 2009. For those who have all their money 401-k plans unfortunately there is not a lot of flexibility. I would suggest checking with your plan administrator to find out which type of funds perform best during those times. In a future article I will post the results of testing the types of funds which are available in most 401-k plans to see if any offer superior returns.

For those of you with IRA's who are not familiar with exchange traded funds (ETF) I have good news for you. As you may know IRA plans allow much more flexibility in investment choices which includes the ability to invest in ETF's. I would suggest you "google" ETF for a more detailed explanation of what an ETF is but for our purposes I'll give a basic definition and the most important advantages that an ETF has over mutual funds. An ETF is designed to be similar to a mutual fund in the sense that it diversifies risk into many different stocks. The two most important advantages over a traditional mutual fund are: 1) An ETF is traded on a stock exchange just like a stock. So you can exit a position intraday. Mutual funds don't offer this flexibility. 2) Fees are lower with ETF's. But here's the most exciting part. There are a class of funds called "inverse" or "bearish" funds. Simply put these are funds which are designed to move in the opposite direction of a typical ETF or mutual fund, which is designed to profit only if the market moves up. One such fund is the Proshares Short S&P 500, ticker symbol "SH" which trades on the NYSE. Remember my long term model gave a red arrow in November 2007? Those of you with IRA plans could have moved all of your money into this fund (SH) at a price of 60.56 in November 2007 and exited at a price of 78.25 in March 2009 when the arrow turned green again (click on image below). This would have earned you a return of 29% over a 16 month period. Much better than the puny returns a money market would have paid, wouldn't you agree?



That's all I have for this week. If you have any questions or feedback regarding this or any other subject, please comment. Have a great weekend.