The Tycoon Report

2 Investing Trends You Can't Afford to Ignore

Wednesday, January 20, 2010 | Teeka Tiwari

One thing we can be sure of is that 2010 will not look like 2009, the way 2009 looked nothing like 2008.

Each year brings its own little twist and investor focus. We started out the first quarter of 2009 still stuck in the down move of 2008, but after Q1 2009, it was straight up.

How Will We Remember 2010?

Now in Q1 of 2010, we're still in this consolidating action that characterized much of last quarter's action. It's the direction of the next big breakout after this consolidating period that will set the way for the rest of 2010.

The old adage is that the broader the base (i.e., the consolidation period), the bigger the move -- either up or down.

Again, the key is the direction of the move after the consolidation period is over. Whichever direction that ends up being, we have a reasonable assurance that the next move will have legs.

This is very important to remember, so repeat it with me: The broader the base, the bigger the move.

Potentially Major Movers

We're already starting to see the Nasdaq-100 (Symbol: NDX) and the S&P 500 (Symbol: SPX) break out of their bases to the upside. The action in these two indexes is pointing to higher prices. (You can track the Nasdaq-100 and the S&P 500 on such free sites as BigCharts.com.)

For those looking for new equity exposure, these are two areas of the market that are showing strength.

You can use ETFs to get exposure to either index, with the First Trust Nasdaq-100 Tech Sector ETF (QTEC) covering the Nasdaq-100 and the S&P SPDRs (Symbol: SPY) covering the S&P 500.

Braver souls who know what they are doing on the risk-management front can also purchase Nasdaq and S&P 500 index futures to play this move higher.



Speaking of Risk Management...

Remember, this is the stock market, and things happen all the time that change investor sentiment.

We have many of the big banks reporting earnings this week that could push sentiment either way.

The technicals are pointing up for NDX and SPX, but you must always trade with a stop-loss or some type of a hedge (such as a protective put option) to protect yourself from the market's uncertainty.

They key to sustained gains is to stay with the trend but to always have your escape hatch (in the form of a stop or protective option) ready in case the trend changes.

So, what are the trends to watch in the coming weeks and months? There are two over-arching themes right now, both tied to inflation, both here and abroad.

Theme 1:
Rising Interest in Where Rates Will Go

One of the big themes this year is sure to be interest rates. Everyone and their mother expects interest rates to rise.

And they are right -- interest rates will rise at some point. But the truth is, nobody knows when.

In the interim, the longer-term technical indicators still point to rates going down, not up.

Ten-year Treasuries are catching a bid once again after getting hammered on that surprisingly good Dec. 4 jobs report.

Eurodollars have also rallied nicely since undergoing a downward price shock when the Dubai de facto bond default news broke.

Just like in 2005 when that we all knew real estate had to go down at some point, it wasn't until 2007 that we started to see the first big cracks appear in that market.

So, yes -- printing massive amounts of dollars will be inflationary. And, yes, interest rates will have to go up ... but not yet. I still think there is money to be made by going long Treasuries for short-term traders using tight stops.

Remember, Fed-led quantitative easing is supposed to end in March. If the economic data falls off a cliff between now and then, the Fed will have to extend its efforts.

This Fed has no stomach for doing the difficult-but-right thing; that is, allowing the economy to right itself on its own.

Remember, the cure for the recession is THE RECESSION! The more you get in the way of that, the longer you prolong the pain.

The Federal Open Market Committee has become much more political over the last 20 years and, as such, it will probably keep interest rates too low for too long.

This will ultimately lead to an even bigger profit opportunity to short bonds in the future.

Yes! We will catch them both coming and going in the Treasury market!

Fighting two expensive wars and paying for massive entitlement spending will ultimately lead to inflation as the United States attempts to print itself out of trouble, as it did in the 1970s when it was faced with the cost of the Vietnam War.

But we are not there yet.

The bigger story over the short term could be the Fed deciding to keep rates lower for longer than the Street expects. Prices on Treasury futures appear to be supporting this view and, for those of you who trade futures, the 10-year Treasuries look good for at least a 3- to 4-point rally.

Theme 2:
The China Story

No portfolio is complete without some diversification. And there is literally a whole world full of opportunities to let us make global plays right here on the U.S. markets.

Since November of last year, China has been lagging our markets quite badly.

Remember, price action is more important than your own opinion or the opinion of anybody else, no matter how smart they seem.

We must always be watching the price action, it will tell us so much more than the headlines. The price action out of China hasn't suggested upside consolidation the way that U.S. markets have since November. The Chinese markets have been suggesting a downward consolidation where large institutions are net sellers of stock.

If you look at one of the most-active China fund, the SPDR S&P China ETF (Symbol: GXC), you'll see that it peaked on Nov. 16 at $76.30. It's been making lower highs and lower lows since then.

So far, it's been trapped in a trading range between the November high and the Dec. 22 low of $69.60. Every time it moves lower, it makes a new relative low -- and each subsequent bounce is weaker than the last.

When compared to the way other global markets are trading, this type of action is worrisome. It suggests that a sizable leg lower could be in the offing for Chinese stocks.

Adding fuel to this fire is the tightening of the money supply by the Chinese central bank.

The country is very concerned about the quality of the more than $1 trillion in loans that were made last year, and it is attempting to engineer a "soft landing" of sorts.

They are trying to head off inflation while, at the same time, reigning in out-of-control bank lending.

Aside from raising short-term rates, they have also raised minimum capital requirements for all of their banks.

I'm not suggesting that the Chinese story is over -- far from it. What I am suggesting is that a Chinese stumble could be in the offing.

Such a fall could well lead to the next big buying opportunity in China and in the global commodity market.

It would be naive to not expect commodity prices to undergo some type of downside price shock, should China get in trouble. The key is to remember that any such shock would be short term in nature and not a trend reversal.

Long-term bull markets are generally full of buying opportunities, and I certainly expect that to be true of both the China story and the commodity story.





Teeka Tiwari
Chief Investment Officer
ETF Master Trader