Trends I'm Watching

Is Buy and Hold Dead?

Trend: The Buy and Hold investment strategy is losing favor among investors due to the losses suffered in the market decline that started in 2008.

We are seeing some investors adopt trading strategies, such as the 50-day / 200-day Moving Average crossover approach to identify buy and sell signals.

The golden cross is a buy signal created when a shorter term moving average crosses above a longer term moving average. It's an especially strong signal when the 50 day moving average crosses above the 200 day moving average. The death cross is the reverse, a sell signal when the 50 day moving average crosses below the 200 day moving average.

Jason Zweig at the Wall Street Journal describes research that challenges some of the assumptions that underlie the Buy and Hold strategy. Excerpts below.

Link: WSJ.com: The Intelligent Investor 2/26/2009

Finance professor Elroy Dimson of London Business School ...estimates that we'll have to wait nine more years before the Dow average, including dividends, has a 50% chance of hitting its 2007 highs.

The report also challenges the conventional wisdom that a run of bad results in the past must be followed by good returns in the future. Following the worst years, stocks outperformed cash over the next five years by an annual average of 7.1 percentage points. But after the best years, stocks outperformed by 6.8 percentage points annually -- a statistical dead heat. "If you were trying to find a rule buried in this as to what investors should do to make money," says Prof. Dimson, "it's kind of hopeless."

The report hammers home another uncomfortable truth. The belief that stocks become virtually riskless if you just hold onto them long enough -- popularized a decade ago in books like Jeremy Siegel's "Stocks for the Long Run" and James Glassman and Kevin Hassett's "Dow 36,000" -- has been shattered by reality. No matter how long your investing horizon may be, the risk of owning risky assets can never go to zero.

Highly-Rated Stocks in an Uptrend

Trend: Health industry stocks prevail among highly-rated stocks in an uptrend.

Highly-rated stocks are stocks with a 10 rating at MSN StockScouter.

Uptrend means the 50-day moving average is above the 200-day moving average (the golden cross).

Below are the 15 stocks with a 10 rating at MSN StockScouter and above the golden cross with a price about $1.00.

Symbol	Company Name	Last Price	Rating	50-Day Moving Average	200-Day Moving Average	Avg. Daily Vol. Last 2 Weeks	Market Capitalization
VITA	Orthovita Inc	2.96	10	3.2	2.7	218,180	224,708,000
QCOR	Questcor Pharmaceuticals Inc	6.71	10	7.4	6.4	600,130	435,841,300
INFI	Infinity Pharmaceuticals Inc	7.89	10	7.8	7.3	24,770	189,888,400
SLXP	Salix Pharmaceuticals Ltd	8.29	10	8.7	7.8	384,710	398,434,800
TSYS	TeleCommunication Systems Inc	8.9	10	8	6.7	813,770	391,951,000
CSGS	CSG Systems International Inc	13.52	10	15.5	15.4	344,250	469,417,000
CBST	Cubist Pharmaceuticals Inc	16.58	10	22.2	21.5	2,157,430	944,753,600
OZRK	Bank of the Ozarks Inc	18.99	10	24.2	24.1	171,930	320,247,300
ENDP	Endo Pharmaceuticals Holdings Inc	20.78	10	22.8	22.2	1,210,550	2,421,459,000
EBS	Emergent BioSolutions Inc	21.03	10	23.6	16.2	575,870	629,241,000
THOR	Thoratec Corp	24.58	10	29	23.7	1,391,770	1,378,284,000
INT	World Fuel Services Corp	26.73	10	33.6	27	765,280	782,066,300
SPH	Suburban Propane Partners LP	32.38	10	36.2	35.8	190,690	1,061,902,000
QSII	Quality Systems Inc	39.25	10	39.6	36.7	437,160	1,113,553,000
GHL	Greenhill & Co Inc	65.87	10	65	63	293,110	1,856,847,000

*StockScouter compares the fundamental and technical qualities of stocks to measures that have proven statistically predictive of stock performance in the past.

European Banks at Risk

Trend: Many Western European banks are highly leveraged with massive loans to emerging market countries that are in deep recessions.

John Mauldin at Thoughts from the Frontline discusses Europe's banking problems and the paucity of mechanisms for rescuing them from their bad decisions. Excerpts below.

Link: While Rome Burns - Thoughts From The Frontline - InvestorsInsight Publishing.

Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.

The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.

Western European banks have been very aggressive in lending to emerging market countries worldwide. Almost 75% of an estimated $4.9 trillion of loans outstanding are to countries that are in deep recessions. Plus, according to the IMF, they are 50% more leveraged than US banks.

Today the euro rallied back to $1.26 based upon statements from German authorities that were interpreted as a potential willingness to help out non-German (in particular, Austrian) banks.

This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?

Customer Satisfaction and Stock Prices

Trend: Above average and improving customer satisfaction ratings affect stock prices in a positive direction.

BusinessWeek describes research on predictive value of quarterly customer satisfaction scores and stock prices. Excerpts below.

How to Play - BusinessWeek.

A recent study—conducted by Vanderbilt University’s Owen Graduate School of Management Professor Bruce Cooil and four co-authors—looked at the predictive value of quarterly customer satisfaction scores from 1996 through 2006. Buying all of the companies with high scores wasn’t a consistent winning strategy. But a portfolio of companies whose ACSI scores had risen over the past year and were above the national average far outperformed the market, gaining an average 1.08% per month. Over the 10-year period, the portfolio more than tripled, gaining 212% while the Standard & Poor's 500-stock index rose 105%. Companies whose scores had declined and were below average lagged the market, losing 2%.

For the current market, the study also uncovered a more sophisticated strategy that could reduce risk. An investor who bought the above-average and rising-score portfolio and simultaneously sold short the below-average and falling group had slightly better performance over the 10-year period with much less volatility.

Each quarter’s release of ACSI scores, generated from telephone polling of about 65,000 consumers a year, covers different sectors. Fourth-quarter scores, released on Feb. 17, included traditional retailers, banks and insurance companies, and e-commerce vendors. Of 65 company scores released, 13 public companies outpaced the national average of 75.7 with scores that had also risen over the previous year—including Kroger, CVS, and MetLife. Twelve public companies underperformed the national average with scores that had also declined, including Macy's and Aetna.

Best Performing ETFs for the Past 4 Weeks

Trend: ELEMENTS MLCX Gold TR ETN (GOE) led the four week performance (+270%). UltraShort Real Estate ProShares (SRS) and PowerShares DB Gold Double Long ETN (DGP) were the second and third best performers, respectively.

The 20 ETFs with the best 4 week performance through 2/20/2009 tracked by Morningstar are highlighted below.

Source: MSN Money Exchange Traded Funds (ETFs) Performance Tracker

Name	Ticker	Category	Holdings	Morningstar	Last Price*	1-Wk	4-Wks	13-Wks	YTD	52-Wks	3-Yrs	5-Yrs
ELEMENTS MLCX Gold TR ETN	GOE	Specialty - Precious Metals			$50.99	127.59	269.96	310.45	261.05	N/A	N/A	N/A
UltraShort Real Estate ProShares	SRS	Specialty - Real Estate	holdings		$72.28	34.60	39.06	-60.34	63.01	-20.80	N/A	N/A
PowerShares DB Gold Double Long ETN	DGP	Specialty - Precious Metals			$23.08	5.22	34.06	69.03	22.50	N/A	N/A	N/A
PowerShares DB Crude Oil Dble Short ETN	DTO	Specialty - Natural Resources			$230.72	11.09	33.51	138.89	59.75	N/A	N/A	N/A
E-TRACS UBS Bloomberg CMCI Silver ETN	USV	Specialty - Precious Metals			$20.51	1.67	28.71	60.37	27.53	N/A	N/A	N/A
UltraShort Russell2000 Value ProShares	SJH	Small Company	holdings		$97.08	19.71	27.71	-18.19	46.69	40.80	N/A	N/A
UltraShort Industrials ProShares	SIJ	Specialty - Unaligned	holdings		$78.44	15.07	25.87	-7.45	40.46	119.90	N/A	N/A
UltraShort MSCI Japan ProShares	EWV	Pacific Stock	holdings		$99.73	13.09	25.15	-6.52	45.64	39.56	N/A	N/A
iShares Silver Trust	SLV	Specialty - Precious Metals	holdings		$14.25	4.19	25.00	52.62	24.00	-20.08	N/A	N/A
PowerShares DB Silver	DBS	Specialty - Precious Metals	holdings		$25.98	3.49	24.69	50.17	23.17	-21.49	N/A	N/A
E-TRACS UBS Bloomberg CMCI Gold ETN	UBG	Specialty - Precious Metals			$27.51	3.09	21.09	35.61	10.55	N/A	N/A	N/A
UltraShort Russell1000 Value ProShares	SJF	Growth	holdings		$150.74	16.67	20.99	-5.60	40.82	86.08	N/A	N/A
iPath DJ AIG Prec Metals TR Sub-Idx ETN	JJP	Specialty - Precious Metals			$51.90	4.01	20.89	37.71	14.69	N/A	N/A	N/A
UltraShort Russell MidCap Val ProShares	SJL	Growth	holdings		$111.59	14.27	20.74	-18.93	31.09	85.45	N/A	N/A
UltraShort SmallCap600 ProShares	SDD	Small Company	holdings		$86.78	14.53	20.22	-17.89	38.84	58.13	N/A	N/A
UltraShort Financials ProShares	SKF	Specialty - Financial	holdings		$188.25	37.72	20.15	-16.48	80.68	65.47	N/A	N/A
ELEMENTS MLCX Precious Metals ETN	PMY	Specialty - Precious Metals			$8.70	2.97	19.89	35.06	15.66	N/A	N/A	N/A
UltraShort 20+ Year Treasury ProShares	TBT	Government Bond - Treasury	holdings		$46.41	3.07	18.19	-15.17	25.55	N/A	N/A	N/A
PowerShares DB Commodity Dble Short ETN	DEE	Specialty - Natural Resources			$95.88	7.47	17.91	56.87	29.52	N/A	N/A	N/A
UltraShort Dow30 ProShares	DXD	Growth	holdings		$71.55	11.85	17.79	0.71	30.56	69.96	N/A	N/A

Disclosure: We may own any EFT above at any time.

Please verify the performance of any ETF before investing.

Investing in the Smart Grid

Trend: Smart grid technologies reduce wasted energy, which is increasingly attractive as the costs and trade-offs of building more power plants become known.

Chris Nelder at Energy & Capital describes how smart grids save energy and why smart grid technology has great potential.

Link: Smart Profits on the Smart Grid

It's not every day that you see an opportunity to get in on the ground floor of a whole new industry, but smart grid technology is just that.

The "smart grid" term has come to encompass a whole array of different technologies, creating some confusion about exactly what it is. It doesn't help that the publicly-traded companies in the sector are mostly young, with cheap stocks regarded as speculative.

What investors should not be confused about is the outlook for this sector, which is nothing short of spectacular.

In many ways, the smart grid is about reducing wasted energy. That's not just good policy; it's also good business. Deploying energy saving technologies usually pays for itself quickly, and always pays for itself in the long term. It also cuts down on greenhouse gas emissions from generating unneeded power.

Smart grid technologies are going to receive a nice boost from the U.S. stimulus package as well. The Senate bill includes $11 billion to improve the electric grid.

Between the cost benefits, the lower emissions, and federal funding, investing in smart grid technologies now is a no-brainer.

Smart metering can give customers immediate feedback on their own energy consumption....Smart meters communicate usage data to the utility electronically....

But that's just the beginning. Smart meters also enable a host of other technologies. Smart appliances can take orders from smart meters about when and how to run, and when not to run. Likewise, smart sockets can control the usage of dumb devices plugged into them. The utility can quickly pinpoint service outages, and restore service more quickly.

Smart meters also allow customers with solar, wind, and micro-hydro systems to sell power back to the grid, thus enabling the deployment of more distributed generation. As plug-in hybrid vehicles become more common, smart meters will be able to use them as distributed storage, drawing down a small part of their battery power by agreement of the vehicles' owners. In time, such "vehicle-to-grid" power technologies could be the "holy grail" of renewable energy, by giving the grid a way to store energy from intermittent sources like wind, then use it later when it's needed.

Renewable Energy Stimulus Takes Shape

Trend: U. S. green companies will likely benefit greatly from the renewal energy tax credits in the renewable energy stimulus.

Nick Hodge at Wealth Daily says a few sectors have been declared early winners now that the $787 billion stimulus has been signed into law. Excerpts below.

Link: Renewable Energy Stimulus.

$104 billion is slated to come green's way... a full 13% of the stimulus package.

Here is where some of that money is going:

• $4.5 billion to boost the energy efficiency of federal buildings

• $6.3 billion for energy efficiency and conservation grants

• $5 billion to weatherize old buildings

• $2.5 billion for energy efficiency and renewable-energy research

• $6 billion for new loan guarantees for wind and solar

• $6 billion for cleaning up toxins on former military sites

• $1.2 billion to fund the Environmental Protection Agency's environmental cleanup programs

The cleantech industry is about to enjoy a more equal share of the subsidies that have been afforded the oil and coal industries for years.

Leveraging the Stimulus for Profit

The two parts of this bill that will do the most to aid the cleantech industry are the extension of the production tax credit (PTC) and the newly created ability to claim an investment tax credit (ITC) or grant in lieu of the PTC.

Golden Cross for the Gold ETF GLD

Trend: On February 10, the 50-day moving average crossed the 200-day moving average for the ETF GLD, the so-called Golden Cross.

If you believe that technical analysis has merit, you might take note of this occurrence. It's the first Golden Cross for GLD since December of 2007.

 

Speaking of Technical Analysis, Eric Wish of the excellent Wishing Wealth Blog says:

Jim Cramer ... has become a recent convert to technical anaysis, now even citing the impressions of IBD chart analysts.  I think it amusing that Cramer now asserts that he has always valued technical analysis.  This is pure revisionist history –- for many months he poked fun at chartists as morons.  I think that the failure of so many of the stocks he touted for months based on his purely fundamental analysis  has given him a little TA religion -– or maybe he is just sucking up to IBD,  one of his show’s sponsors…. (Link: Wishing Wealth Blog).

Best Performing ETFs for the Past 4 Weeks

Trend: PowerShares ELEMENTS MLCX Gold TR ETN (GOE) led the four week performance (+62%).  Ultra Silver ProShares (AGQ) and PowerShares DB Crude Oil Dble Short ETN (DTO) were the second and third best performers, respectively.

The 20 ETFs with the best 4 week performance through 2/13/2009 tracked by Morningstar are highlighted below.

Source: MSN Money Exchange Traded Funds (ETFs) Performance Tracker

Name	Ticker	Category	Holdings	Morningstar	Last Price*	1-Wk	4-Wks	13-Wks	YTD	52-Wks	3-Yrs	5-Yrs
ELEMENTS MLCX Gold TR ETN	GOE	Specialty - Precious Metals			$19.05	11.71	61.83	85.19	58.64	N/A	N/A	N/A
Ultra Silver ProShares	AGQ	Specialty - Precious Metals			$44.82	8.92	59.16	N/A	42.29	N/A	N/A	N/A
PowerShares DB Crude Oil Dble Short ETN	DTO	Specialty - Natural Resources			$215.39	17.54	34.26	153.91	47.50	N/A	N/A	N/A
PowerShares DB Gold Double Long ETN	DGP	Specialty - Precious Metals			$20.84	6.98	31.73	60.31	15.20	N/A	N/A	N/A
UltraShort DJ-AIG Crude Oil ProShares	SCO	Specialty - Natural Resources			$47.27	22.29	29.82	N/A	39.86	N/A	N/A	N/A
Ultra Gold ProShares	UGL	Specialty - Precious Metals			$35.63	6.29	29.71	N/A	12.75	N/A	N/A	N/A
iShares Silver Trust	SLV	Specialty - Precious Metals	holdings		$13.54	4.88	27.74	45.59	20.89	-20.97	N/A	N/A
PowerShares DB Silver	DBS	Specialty - Precious Metals	holdings		$24.56	4.60	27.58	44.82	20.04	-22.41	N/A	N/A
E-TRACS UBS Bloomberg CMCI Silver ETN	USV	Specialty - Precious Metals			$19.68	1.44	26.97	58.20	25.81	N/A	N/A	N/A
B2B Internet HOLDRs	BHH	Specialty - Technology	holdings		$0.28	3.70	21.74	-15.15	21.74	-28.21	-22.13	-15.09
Market Vectors Gold Miners ETF	GDX	Specialty - Precious Metals	holdings		$35.68	0.73	20.87	64.73	5.31	-25.29	N/A	N/A
ELEMENTS MLCX Precious Metals ETN	PMY	Specialty - Precious Metals			$8.36	8.91	20.52	39.40	13.33	N/A	N/A	N/A
UltraShort 20+ Year Treasury ProShares	TBT	Government Bond - Treasury	holdings		$47.71	-2.25	17.77	-24.51	26.45	N/A	N/A	N/A
UltraShort MSCI Japan ProShares	EWV	Pacific Stock	holdings		$90.50	14.96	17.69	7.91	34.49	21.81	N/A	N/A
PowerShares DB Crude Oil Short ETN	SZO	Specialty - Natural Resources			$80.13	10.38	16.92	66.29	20.86	N/A	N/A	N/A
iPath DJ AIG Prec Metals TR Sub-Idx ETN	JJP	Specialty - Precious Metals			$49.22	3.71	16.88	31.92	9.87	N/A	N/A	N/A
PowerShares DB Precious Metals	DBP	Specialty - Precious Metals	holdings		$32.47	3.21	16.51	30.92	9.11	-2.67	N/A	N/A
UltraShort Financials ProShares	SKF	Specialty - Financial	holdings		$145.53	15.23	14.68	-2.07	41.28	34.01	N/A	N/A
PowerShares DB Gold	DGL	Specialty - Precious Metals	holdings		$34.35	3.46	14.50	27.09	6.88	2.10	N/A	N/A
UltraShort Russell2000 Value ProShares	SJH	Small Company	holdings		$81.93	13.16	14.49	-1.07	27.52	27.81	N/A	N/A

Disclosure: We may own any EFT above at any time.

Please verify the performance of any ETF before investing.

ETFs for a Falling Dollar

Trend: The US Dollar will fall in value if/when trillions of dollars are created for the stimulus package.

Luke Burgess at Gold World identifies two inverse U.S. dollar ETFs that he believes are a good investment hedge against a falling U.S. dollar.

Link: Investing in Currency ETFs.

An inverse fund profits from a decline in the value of an underlying benchmark. In the case of an inverse U.S. dollar fund, the underlying benchmark is usually the U.S. Dollar Index.

The U.S. Dollar Index is a trade-weighted measure of the value of the U.S. dollar relative to a basket of six foreign currencies. The six currencies and their trade weights are:

Components of the U.S. Dollar Index
Euro	57.6%
Japanese yen	13.6%
British pound	11.9%
Canadian dollar	9.1%
Swedish krona	4.2%
Swiss franc	3.6%

The main advantage of using the U.S. Dollar Index as the benchmark in an inverse U.S. dollar fund is the diluted exposure to risk associated with individual currencies and issuing countries, even though the Index is heavy with the euro.

There is also another kind of U.S. dollar index used by the Federal Reserve called the Trade-Weighted U.S. Dollar Index. It was created to better reflect the dollar's value against foreign currencies based on how competitive U.S. goods are compared to other countries. The Trade-Weighted U.S. Dollar Index comprises 26 world currencies, but is still heavy in the euro, Canadian dollar, and Chinese yuan.

Unfortunately, as it stands today, there is no fund that tracks the Trade-Weighted U.S. Dollar Index. So we have to stick with what we've got.

Horizons BetaPro U.S. Dollar Bear Plus ETF [TSX: HDU]

The Horizons BetaPro U.S. Dollar Bear Plus ETF returns daily investment results equal to 200% the daily inverse performance of a U.S. dollar denominated Canadian dollar futures contract for the next delivery month.

This is the only U.S. dollar inverse ETF that does not track the U.S. Dollar Index and may be a better investment for investors especially long the Canadian dollar and especially short the U.S. dollar.

PowerShares DB US Dollar Index Bearish ETF [NYSE: UDN]

The PowerShares DB US Dollar Bearish Fund is based on the Deutsche Bank Short U.S. Dollar Index Futures Index, which is designed to replicate the performance of being short the U.S. Dollar Index.

... if you're looking for a simple and limited-risk ETF to hold as a hedge against a falling U.S. dollar, the PowerShares DB U.S. Dollar Bearish ETF is probably your best bet.