Daily Investment Interpretations

January 5, 2011

2011-1-5 (Wednesday Night): The bulls were running at Pamplona again today: Dow's win streak plays on. The NASDAQ Composite advanced 20.95 points (0.78%%) to 2,702. The Dow gained 31.71 points (0.27%) to  11,722.89, while the S&P 500 rose 6.36 points (0.05%) to close at: 1,276.56. Oil closed at $90.34 a barrel, and Gold ended at $1,378. The VIX declined 0.36 to 17.02.  
    Mark Hulbert writes: Last year’s rankings are not this year’s.
    Nick Godt's article is: Hot hands cool and a skeptical bull.
    Paul Farrell's contribution is America’s 10 worst years start right now.
    Two topics commend themselves tonight.
    One is that if we suppose that by December 31, 2011, the markets will be up about 15% from tonight's close, then the S&P 500 will rise about 192 points by year's end, averaging a gain of about 0.8 points a day. The S&P 500 has gained about 20 points over the past three days, which would take 5 weeks (25 days) to realize at the average 0.8 point-a-day rate of rise. In other words, the indices have risen at about 8 times their average rates over the past three days. This means that sooner or later, a lot of backing and filling and sideways movement is going to occur to allow the indices to return to their underlying 0.8-point-a-day trend lines. Bottom line: the markets may correct before they go much higher. That said, though, money is pouring back into the stock markets from the bond markets, and into the U. S. versus emerging markets. Since it looks as though we've got a solid recovery going (although this thesis may be sorely tested every time the markets pull back), maybe it's time to treat this as a normal economic recovery and to buy into the markets before they go any higher.
    The second topic concerns strategies for playing the recovery. My ideas are changing from day-to-day, but two themes suggest themselves.
    One of them is something I've mentioned before: buying deep-in-the-money, long-expiration calls on the emerging market ETF: EEM. The emerging market calls I own are the -EEM130119C46 $46, at-the-money calls expiring on 01/19/2013. They're up 16% over the past couple of weeks. Another way to play this is to buy the Direxion 3X ETF: EDC. This highly leveraged index fund has more than doubled since it hit bottom last summer, and has more than 8-folded since the bottom in March, 2009. Like my calls, it's up about 16% since mid-December. This works great in up-markets, and terribly in down markets.
    Another approach that has an amazing track record in both up and down markets is the  TopStock Portfolios Daily Decisions investment advisory service. Both their Aggressive portfolio and their Hybrid portfolio have quadrupled (!) over the past two years. In other words, on average, their portfolios have doubled each year for two years! Even better, their portfolios thrive in both up and down markets, so you have a measure of safety there that isn't to be found when you're buying calls or leveraged ETFs. TopStock Portfolio trades occur only every few months and, in the case of the new Hybrid Model, between cash and leveraged ETFs. This advisory service can be used in IRAs, and doesn't involve anything complicated.
    I should note that the average annual return for TopStock Portfolios' Main Model over a (simulated?) 28-year period has been 24.76% per year. (The Main Model has never had a "down" year.) My personal persuasion is that their Aggressive and Hybrid Models will do much better For example, in 2009, the Main Model was up 64.48%, while the Aggressive Model rose 155.05% and the Hybrid Model gained 202.32%. In 2010, the Main Model was up 20.00%, while the Aggressive Model returned 61.03% and the Hybrid Model came in with 33.01%. My hope is that these newer models will outperform the Main Model by a factor of two-or-three-to-one, and can double or nearly double our money every year, thousand-folding it in 10 or 11 years..
    How could we "juice" these returns?
    For taxable, non-retirement accounts, one way to almost double the rate of return would be to deposit money in a margin account and then, using 100% margin, buy twice as much as we would using the unleveraged versions of the Hybrid and Aggressive Models. This should be safe because the Daily Decision strategy makes money in both rising and falling markets. In that case, you could nearly quadruple your money every year, thousand-folding it in five-and-a-half or six years. You'd pay 6% or so in (tax-deductible) margin interest, and you'd probably pay straight income tax on your gains. But given such phenomenal rates of gain, it might be preferable to pay an interest penalty to the IRS and keep the money in play.
    This is counting our chickens before they've hatched. The key question is: can you actually bag these kinds of gains?
    I've been testing the Daily Decision Hybrid Model with a small portion of my money for over a year now, and I've been sufficiently impressed with it that I'm in the process of liquidating the rest of my mutual funds and subscribing fully (at least for now) to the TopStock Portfolio strategies.
    Tomorrow night, I'll review one of TopStock's new variations on their Daily Decisions models that, if I understand it correctly, might be much better than even the models described above.

To be continued.