Profit from Today's Fed Decision and Stock Market Meltdown
Tuesday, September 16, 2008 | Chris RoweRating:
By now you've heard all about the sky falling, so I won't get too deep into the reasoning behind the collapse of Lehman, the troubles of AIG or the lifeline thrown to Merrill Lynch. Instead, let's talk about how to profit from it, shall we? (I mean, that's why you opened this e-mail right?)If you have something important to say, start at the end...
I think it's time to buy the PowerShares DB US Dollar Bearish Fund (UDN), which is the inverse U.S. Dollar ETF. I think as the U.S. dollar continues it's long-term down trend, it can trade up 20% over the next 6 - 12 months.
First of all, let me just make a quick note here and tell you that my stance has certainly changed to where I am more bearish than bullish because the NYSE BPI changed from a column of Xs to Os. Recall that based on that indicator, I gave you a put option on the S&P to buy. I guided you out of that with about a 74% profit when the market hit a recent intermediate bottom and the NYSE BPI flipped to Xs again. Anyway, the indicator flipped to Os again on Friday which makes me more bearish than before. I told members of The Trend Rider that it was time to get bearish and recently started entering several bearish positions (and exiting bullish ones).
HOWEVER - At the same time, we are seeing the sentiment indicators, which are contrary indicators, indicate a near bottom. So what we have are two very accurate, time-tested indicators that have made millions in the past (BPI & sentiment indicators) tell conflicting stories. That's not unusual in a crazy market like this.
But this isn't an article about indicators. It's about how to profit from this horrific market whether this is, in fact, an intermediate bottom or the beginning of more bloodshed. So here's what I'm thinking...
Today the Fed will announce at 2:15 est. the new Fed funds rate target (if there is one), and it will give guidance on the next 6 weeks (the next Fed meeting is Oct. 28/29). Most of Wall Street would have told you 1 week ago that a Fed cut is off the table. But with the last week's action, especially yesterday's, that has all changed.
The Fed has been taking steps to keep cash flowing to major brokerage firms and banks by expanding its loan programs. They are obviously taking drastic measures to, as George Bush puts it, "reduce disruptions and minimize the impact of these developments on the broader economy."
If the Fed steps in and cuts rates, it would add pressure to the U.S. dollar and if they don't cut rates and the central bank changes recent signals and suggests it may cut rates soon in the near future, it would also lean on the U.S. dollar.
If you buy UDN, you are betting against the U.S. dollar - a bet that has been profitable for about 6 years. I know all you chartists are probably going to tell me that the U.S dollar index recently penetrated the long-term down trend line and will therefore turn around and move higher, but it did that in 2004, too. But in 2004, the greenback only rallied 6% before declining another 22%!
What's good about this investment is if I'm wrong, and the U.S. dollar rallies more, your risk is minimal. It's not getting any better here in the U.S for a while.
You may recall two weeks ago when I prepared you for the recommendation of UDN. I said the RSI will likely give us a sell signal after a negative divergence. Well we have just seen that negative divergence and sell signal!
The U.S. dollar hasn't been rallying because the U.S. is in such great shape. It has been rallying because there has been a global economic slowdown that I talked about 2 weeks ago in my article titled "Currencies Crashing at Record Rates! Disaster or Opportunity?"
Anyway, I want to leave you off with a recommendation to read another article I wrote recently titled "How To FULLY Insure Your Deposits When Your Bank Closes". The reason I say this is that the FDIC recently announced a rise in the number of banks on its danger list, from 90 to 117. Geesh, imagine if you lose your deposits because your bank folded - and you could have avoided it!
Note: The FDIC does not make its list of member institutions in danger of failing public because it does not want to contribute to a "run on the bank" by concerned depositors.
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“Profit from the Trend”
Chris Rowe
Chief Investment Officer
The Trend Rider
