AGORACOM Client Feature
|Monday, June 27, 2011
Market Follow Up; WARNING on Money Market Mutual Funds!
by Larry Edelson
In last week's column, I told you that “... nearly all markets are now in a position of rolling over, creating potential massive downside moves that will catch most investors by surprise.”
I also said that “It won't be pretty. But there are several things you can do now to protect your wealth and go for some potentially nice, short-term gains to boot.”
Now, let's look at the market action from last week ...
The Dow Industrials plummeted from a high of 12,217.33 on Tuesday to 11,874.94 by Thursday, as I write this column. That's a loss of more than 340 points, a full 2.8%.
It's now tested my first level of technical support. But further declines are coming. Look for the Dow to test the weekly sell signal at the 11,542.62 level. If closed below, the Dow will fall another 200 points almost immediately, to 11,350.
The slide is happening despite largely better-than-expected earnings from major companies, such as FedEx. So why is the Dow sliding, then?
A. It was overbought and due for a healthy pullback, technically and cyclically.
B. The worsening Greek and European debt crisis is weighing on the markets.
C. The upcoming debt ceiling the U.S. will hit on August 2 is also sending investors scurrying.
The S&P 500 index also tanked, sliding from a high of 1,292.75 on Tuesday to as low as 1,257.00 on Thursday, also a 2.8% whacking.
In last week's issue, I suggested purchases of inverse Index ETFs to take advantage of the decline, specifically, the ProShares Short S&P 500 Fund (SH) ...
Or, if you wanted to be more aggressive, the 300% leveraged inverse ETFs such as the ProShares UltraPro Short Dow 30 ETF (SDOW) ... the ProShares UltraPro Short NASDAQ 100 ETF (SQQQ) ... the ProShares UltraPro Short Russell 2000 ETF (SRTY) ... and the ProShares UltraPro Short S&P 500 Index Fund (SPXU).
If you acted on any of those suggestions, you're in good shape. Hold those positions. The decline in the broad stock market averages is NOT over.
Gold also started rolling over, with a very sharp plunge from a high of $1,559.30 on Wednesday to as low as $1,511.50 on Thursday, a near $48 plunge — more than 3%!
Moreover, as I pen this column, gold is threatening to execute a weekly sell signal by closing below $1,525. If it does, the next area of support will not come into play until $1,477. If that gives way, I expect gold to fall to the $1,330 level.
As I noted in last week's column, it makes no sense getting out of any core gold holdings. Instead, I will be looking to use the summer pullback in gold to load up with a new round of recommendations, to take advantage of the inevitable next leg up.
Silver too, is rolling over. A close below $34.88 will be a weekly sell signal on my system, pointing to a decline in silver to at least the $30.52 level.
Crude oil took the biggest beating, swooning from a high of $95.20 on June 22, to as low as $89.69 as I pen this column, a whopping 5.79% plunge.
The catalyst: The announcement by 28 nations that they will start releasing as much as 60 million barrels of oil on the market to increase supplies and largely offset the oil production lost from the civil war in Libya.
Make no mistake about it: In the long term, the release of strategic oil reserves will do nothing to stop the long-term bull trend in energy prices. In the short term, though, it certainly acted as a catalyst helping to fulfill my forecast for a move lower in oil down to the mid to low $80 region.
A close below $91.57 in oil, based on the nearest futures contract, will be a weekly sell signal.
If you haven't already done so, please print out last week's column. It contains all the important support levels I'm watching in the market, and will be a handy guide you'll want to keep by your side. You can access last week's column by clicking here.
An EXTREMELY IMPORTANT WARNING:
The venerable James Grant of Grant's Interest Rate Observer recently published an article confirming what I suspected all along: Money Market Mutual Funds, or MMMFs, are plowing tons of their investors' money into European banks and securities in search of higher yields.
Never mind the fact that they're picking up, at best, one more basis point of yield (.01) for their investors — enough to double your principal in 6,931.8 years — they're taking on huge lop-sided risks investing in Europe's banks, just as the European sovereign debt crisis is starting to pick up momentum.
Grant cites the five largest money market mutual funds, which hold a total of about $230 billion of customer funds. An average of 41% of their assets are invested in Europe.
That's insane. When Europe goes down the tubes, which it will, that money is at risk, big time. And even if Europe doesn't totally meltdown, the euro is sure to get annihilated in the months ahead. So the currency risk alone could cause these funds to inflict some pretty heavy losses on their depositors.
The five money market mutual funds Grant cites are ...
• Fidelity Cash Reserves (FDRXX)
• Vanguard Reserve Prime (VMRXX)
• Fidelity Inst. Prime MM Portfolio (FIPXX)
• Fidelity Inst. Money Market Portfolio (FNSXX)
• BlackRock Liquidity TempFund (TMPXX)
If you own any of these money market funds, just get the heck out. Period.
Keep your excess, liquid funds in Treasury Bills only, or, T-bill only money market funds here in the U.S. Yes, there's no yield. Yes, the dollar is going to continue to lose value as well. So they have much the same risks, and no rewards, as the funds I mention above.
But, at least they are invested in short-term U.S. obligations, which will be fulfilled, even if the debt ceiling is not raised come August (which I'm sure it will be).
Mind you, that's for money you have lying around that you need liquidity. My view is that up to 25% of your liquid net worth should be in the only true form of money that has ever existed, the only money that is holding its purchasing power through thick and thin: GOLD.
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