With the wild swings we're having in the market, there are times when we just have to step outside of our comfort zone and the kinds of entities we usually buy in The 25% Cash Machine -- and this is one of those times.
For the near term, I want to take a step to protect our capital, following this very sharp, oversold bounce in the major averages. In light of all the recent injections of fiscal stimulus that have been remarked about on the front pages of the worldwide financial newspapers, the fact remains that the U.S. economy has yet to hit bottom and there is a good chance that we could see a retest of the recent lows again, before a true uptrend is established.
After the recent thousand-point rally off the lows, we want to collar the market and protect our downside. Frankly, I'm not so sure that the recent bold-type "all clear" that has been touted in the business sections of our favorite newspapers isn't pre-mature. Last week's economic data was simply terrible and pointed to a very tough three months -- no matter how you slice it.
It looks to me like the CBOE Volatility Index (VIX) drop of more than 30 points in the past six trading sessions was fueled by short-covering, unimpressive volume and the end-of-the-fiscal-year-for-mutual-funds mark up of stocks in order to window dress their performances.
I'm fully aware of how the market has traded through the bad news of the past couple days, and, so OK, I probably sound a bit like a conspiracy theorist -- but I've been doing this for a while and what I'm suggesting is a tried and true pattern we need to acknowledge.
I think that once the elections are over, the market will rapidly re-focus its attention on Price Earnings Ratios and the broad contraction of this crucial multiple for most equities, in light of further earnings downgrades from Wall Street.
Assuming the current consumer downtrend extends itself through Q4 2008 and into Q1 2009, financial results will show further deterioration resulting in further multiple-contraction for the majority of stocks.
So, in this Alert I'm recommending the ProShares Ultra Short S&P 500 (SDS) that's currently trading at $84 per share -- down from the October high of $128.
The Ultra Short has a nice chart on a textbook breakout. It's just too bad that it represents a bear trend for the S&P 500 (SPX).
The SDS has key technical support at $80 -- where its 50-day moving average sits -- or roughly a 5% downside risk. Another trip to the $110-$120 level would represent a gain of 30%-40% and provide the dollar-for-dollar offset our model portfolio would incur if the S&P 500 revisits the mid-800 level.
So, for every $10,000 you have invested in The 25% Cash Machine portfolio, I recommend buying 20 shares of the ProShares Ultra Short S&P 500 (SDS) at market.
It doesn't get any simpler than this when it comes to hedging our bets against the downside of the S&P 500.
I'll provide more information in the November 25% Cash Machine Newsletter coming to you next week. In the meantime, I'm sending this Alert so you can make this buy right now.
I can't wait until we can get back to our usual fundamental approach in The 25% Cash Machine and focus on finding high-yield, high-growth companies, but the markets are as they are and we have to play the hand we've been dealt.
I'll see you Friday with the Weekly Update,
Bryan Perry
Editor The 25% Cash Machine