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Dow 22,000 Is Meaningless; Batten Down the Hatches Instead

By John Persinos on August 4, 2017

The Dow Jones Industrial Average on Wednesday closed above 22,000 for the first time in its history. Pardon me while I stifle a yawn.

Sorry to be a killjoy, but cheer-leading for that landmark is a waste of newsprint and computer pixels. I doubt the Dow will stay at this lofty level for very long and besides, it’s just an excuse for pundits on cable news to flap their gums.

Whenever I listen to the fatuous advice on financial television, it reminds me of a Woody Allen movie in which he plays a financial adviser. When asked about his investment approach, Allen’s character responds: “I invest people’s money until there is nothing left.”

Investor emotions are running hot this week, so here’s some sobering cold water: Economists put nearly 50-50 odds on a recession over the next four years. The Bankrate Economic Indicator, a quarterly survey of top economists, puts the likelihood of a recession during Donald Trump’s first term at 47%.

What’s more, the market is showing “bad breadth,” whereby a handful of large-cap stocks account for most of the market’s rise. That’s a classic red flag of an imminent correction.

As traders react giddily to Dow 22,000, the real headline should be: Stock Index Hits Arbitrary Number. Don’t pop the champagne cork. You should instead take proactive protective steps; below I show you how.

Weighing second-quarter earnings…

There’s no doubt that the corporate earnings recession is over, but let’s properly weigh second-quarter operating results.

The earnings recession officially began in the third quarter of 2015 and came to an end in the fourth quarter of 2016. With 57% of S&P 500 companies reporting actual results for the second quarter of 2017, 73% of them have beaten the mean earnings per share estimate and 73% of companies have beaten the mean sales estimate.

So far, the blended earnings growth rate for the S&P 500 in the second quarter has come in at 9.1%. Strong earnings growth has exceeded expectations, but keep in mind, expectations weren’t that high to begin with and the bar was set low. The stock market’s sharp rise to record levels, as epitomized by the Dow closing above 22,000, has been driven in part by expectations that President Trump will make good on his tax and business plans.

However, with the ugly demise of Trumpcare last month, the president increasingly resembles a lame duck — and he’s only seven months into his term. The recovery of earnings growth and delusional hopes about Trump’s pro-business agenda aren’t enough to sustain the stock market at current levels, much less propel it higher in coming months.

Washington, DC is at loggerheads, with partisan antipathy at the worst level I’ve ever seen in my adult life. Massive infrastructure spending? Sweeping tax reform? Fuhgeddaboudit.

At least, that’s the latest thinking of the International Monetary Fund (IMF).

The IMF last week revised down its 2017 U.S. economic growth forecast from 2.3% to 2.1%, stating that it no longer expects the fiscal stimulus that Trump has promised. Trump also promised 4% economic growth, which clearly isn’t in the cards.

The stock market’s rally since Trump’s election is akin to a “sugar high.” Equity valuations, corporate earnings and economic metrics are out of alignment. Earnings have failed to keep up with the stock market’s rise, making this aging bull market the second-most expensive of the post-World War II era. Second-quarter earnings have been good, but not quite good enough.

Dog days of the Dow …

Now that July has shifted to August, the Dow is entering a two-month stretch historically characterized by stock-market slumps.

Over the past 20 years, August has been the worst month for the Dow’s performance, with an average decline of 1.4%. September tends to be miserable too, generating an average decline of about 1%.

Jim Fink, chief investment strategist of Velocity Trader, succinctly underscores the dangers of Wall Street’s dog-day afternoons: “August is likely to be down.” Consequently, put Dow 22,000 out of your mind and brace yourself for the reckoning ahead. Here are a few easy steps to consider:

You should hold at least 5%-10% of your portfolio assets in precious metals. We prefer exposure to gold via the SPDR Gold Trust (NYSE: GLD), a member of the Personal Finance Fund Portfolio.

For a basic approach, you could simply take a short position against the S&P 500 Index. ProShares Short S&P500 ETF (NYSE: SH) is the obvious choice. SH is an exchange-traded fund that seeks daily investment results that correspond to the inverse (-1x) of the daily performance of the S&P 500.

If you’re an aggressive investor with an appetite for risk and you think the market is headed for a particularly nasty fall, you can double your hedge by purchasing shares in a leveraged short ETF. ProShares UltraShort S&P500 ETF (NYSE: SDS) provides twice the short exposure.

An often-overlooked hedge is to increase your exposure to dividend-paying stocks. Historically, dividends represent a major portion of a stock’s total return. Owning stable companies with solid balance sheets and strong cash flows that pay dividends is a time-tested method for generating above-average returns.

Well-established companies that dole out regular dividends tend to outperform the overall market over both the short and long haul. Since 1927, dividend-paying stocks have returned 11% per year versus 8% for non-dividend paying stocks. What’s more, according to research firm Ibbotson Associates, companies that pay dividends generally have lower stock-price volatility than companies that don’t pay dividends.

Other portfolio protection tactics include paring back your exposure to growth stocks, especially the Silicon Valley darlings that have been bid sky high (see my August 3 issue, Why You Should “Unfriend” Facebook Stock).

For new stock purchases, use a stop-loss order with your broker. By using this order, you can pre-set the value based on the maximum loss you’re willing to tolerate. If the price drops below this fixed value, the stop loss automatically becomes a market order and gets triggered.

Got any feedback or questions? Send me a letter: mailbag@investingdaily.com — John Persinos

Rowing instead of sailing…

In this fraught environment, Jim Fink, the head honcho at Velocity Trader, advises the following:

“Given the risks longer-term, a buy-and-hold stock portfolio will probably not achieve the annual returns you require. A more active trading approach will be needed — rowing instead of sailing.”

To properly get your oars into the water, Jim has devised a trading methodology that can leverage stock movements for exponential gains. In less than a year with this system, Jim racked up 24 triple-digit winners, along with more than 30 double-digit winners thrown in.

Jim calls his investment methodology the Velocity Profit Multiplier system. As he attests: “I’ve built a fortune by sticking with it week after week, year after year.”

Want to know Jim’s secrets? Click here to watch his presentation.

 

 


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