Where to Invest Your Money Right Now

Thursday, June 25, 2009 | Bob De Dea

"Shares Slip and Bonds Fall After Fed Statement"
"Russia Facing Long Recession, World Bank Says"
"Is it Time for Wall Street to Become TARP Street?"

Headlines like these culled from this week's news give no direction for the individual investor. Instead, they tend to leave him or her in a quandary: "Where should I invest?"

Today I'm giving you a gift. As Teeka Tiwari mentioned in his article this week, since June 16, Sector Hunter has given sell signals for 10 different subsectors. While members received instant access to the full list in real time, I'm going to share a couple of actionable items that you can implement today.

How Do We Know When a Sell Signal is Given?

Sector Hunter has made investing simple. It produces alerts that tell you:

1. The sector to trade.
2. The number, type and name of trading opportunities.
3. The type of signal.
4. Whether the sector is on a Relative Strength buy or sell signal.

(For an example of a Sector Hunter alert, see my article from last week here.)

The sectors and subsectors are defined by Investors Intelligence (an analysis and charting subscription service, which first introduced the Bullish Percent Index many moons ago). Many different stocks make up these indices, but for a limited list of ETFs that track such sectors, visit ETF.Stock-Encyclopedia.com.

Today we're going to take a closer look at two of them, the steel and iron sector and Wall Street.

Each of the sectors triggered a 70% sell signal on their respective Bullish Percent Index charts. To remind you what that means, study the chart below:

This is yesterday's BPI of the NYSE. To start, we're just looking at the colors. The light-green bottom signifies the area of the chart below the 30% mark; the light red section at the top, the area of the chart above the 70% mark. When a column of Xs rises above the 70% mark and then reverses to a column of Os, which falls below the 70% mark, it triggers a sell signal, which is what happened earlier this month (June 15, to be exact -- note that the Sector Hunter sell alerts started popping out on June 16).

Now notice the current position (the circled "O" in the last column of Os and the percentage at the top). This is a significant fall -- from a high of 72.29% during the second week of June to 59.27% -- a drop of 13.02%. That means that a LOT of money is being pulled out of the market, with supply taking control and taking profits from the recent bull run.

But the NYSE BPI is showing us that the bull run is about to come to a screeching halt.

Here's the BPI of the steel and iron sector:

Even though the plunge started from a high of 96%, the move below 70% didn't actually occur till June 19, prompting a Sector Hunter alert on the 22nd (there was a weekend in between).

But in case you're wondering whether the better part of the movement down has already occurred, look at the typical behavior (i.e., the history) of this sector. Although it could bop back up from here (like it did in May 2008), it doesn't hang out at these levels for very long at all.

So here are two ways to play this sector (please note that these are not direct recommendations but, rather, trading ideas):

1. You can buy in-the-money puts on United States Steel (X, currently at $31.13). Go out three or four months (and don't forget to check the delta, which tells you how much the options are expected to move in comparison to the underlying security, at 888options.com). I've had great luck and good returns trading this stock in the past. If you'd rather make a direct play, you can instead short the stock itself instead of buying puts.

2. For a more balanced approach, since it's made up of many stocks, you might buy in-the-money puts on the Market Vectors Steel ETF (SLX, currently at $41.27), or short SLX itself.

Now for our second sector subject, Wall Street:

The last time Wall Street was this high was in early 2007, before it soiled itself -- I mean, its reputation. The fall below 70% for this sector also took place on the 19th, triggering a Sector Hunter alert on the 22nd.

Although it appears to be trending upward, take a look at the last time it flirted with the 70% mark. (late 2005, late 2006 and early 2007). Typically, the moves from here don't tell a pretty story. And don't forget, we've got to take into consideration the NYSE BPI action.

Here are two possible ways to play this sector (again, these are trading ideas and not recommendations):

1. You can buy in-the-money puts on or short Interactive Brokers Group (IBKR, currently at $14.83).

2. If you prefer ETFs for diversity, as do I, you could buy in-the-money puts on or short the Financial Select SPDR (XLF, currently at $41.27).

There you have it. Happy Solstice to you all!

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Bob De Dea
Chief Investment Officer
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