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  • Why The Stock Market Could Be Set Up For A Sudden Plummet

    Investors need to be careful, as the risks on key stock indices are continuously piling up. They need to keep a close eye on their portfolio, and maybe should consider taking some profits off the table.

    Since the beginning of the year, key stock indices, like the S&P 500, have been constantly increasing in value and making new highs. Recently, we witnessed the S&P 500 reach above 1,700, and other key stock indices, like the Dow Jones Industrial Average, entering uncharted territory as well.

    With these increases, investors are now asking: how high can the key stock indices really go?

    Looking at the broader picture, the U.S. economy isn't performing as well as the key stock indices are suggesting. In times of high economic activity, the stock market tends to perform well. This is not the case for the U.S. economy as it stands, as the U.S. gross domestic product (NYSE:GDP) only increased at an annual pace of 1.7% in the second quarter of this year. (Source: "Gross Domestic Product, second quarter 2013 (advance estimate)," Bureau of Economic Analysis, July 31, 2013.)

    On top of this, the unemployment situation is still bleak in the U.S. economy, risking deterioration in consumer spending. The average American Joe is still facing many problems: look at food stamp usage and the amount of homes under negative equity, for instance.

    Adding to the worries, the global economy is also showing signs of deep stress, with countries across the map showing concerns. For example, China is expected to show a significantly lower growth rate compared to its historical average this year, and the eurozone remains troubled with debt-infested nations still in recession and the stronger ones facing anemic growth.

    From a more focused viewpoint, the earnings of companies on key stock indices are improving, but they are not as impressive. Consider this: as of July 26, 73% of the companies on the S&P 500 that reported their corporate earnings beat expectations. Unfortunately, as great as this may sound, little more than half of them registered revenues above expectations. (Source: "At mid-point, S&P 500 companies beating estimates by 2nd smallest margin since 2009," FactSet, July 26, 2013.)

    This is important, because it suggests the companies on key stock indices may not be selling as much as is anticipated. Furthermore, we have also seen increased buybacks from companies on key stock indices, which essentially helps in engineering corporate earnings per share.

    Where are key stock indices going next?

    At the very core, the risks mentioned above are notable and shouldn't go unnoticed.

    Despite this, investors also should note that key stock indices may just continue to go higher for the short term, just simply based on momentum and optimism. There is a significant amount of bullish presence. Eventually, they'll adjust and come back to reality. It can take time, but practicing good portfolio management techniques can protect investors from huge losses when that time comes.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Daily Gains Letter is a team of Investment Strategist. This article was written by Moe Zulfiqar, one of our Editor. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

    Aug 08 8:37 AM | Link | Comment!
  • ETFs For A Mature Market With Real Signs Of Economic Growth

    ETFs for a Mature MarketThe S&P 500 and Dow Jones Industrial Average may be trading at record highs, but not everyone is enjoying the so-called signs of economic growth. In fact, there isn't too much for the average American to cheer about when it comes to the U.S. economy.

    Fortunately, investors looking to benefit from real economic growth may consider diversifying their investing boundaries and looking at exchange-traded funds (ETFs) with exposure to one of the most mature economies in the world: the United Kingdom.

    As Wall Street and the Federal Reserve celebrate economic growth in America, here are a couple numbers to consider: U.S. unemployment remains stubbornly high at 7.4% (and has been above seven percent for over four years now) and the underemployment rate is at an eye-watering 14% (and has been at least 14% since 2009). On top of that, wages are flat (minimum wage has been stuck at $7.25 an hour since July 24, 2009), personal debt is up, the growth rate of real disposable income is at its lowest levels in decades, and, not surprisingly, July's consumer confidence numbers slipped.

    Many point to housing as a sure sign of economic growth; however, U.S. home ownership is at its lowest level in 18 years and U.S. housing prices are still 25% below their 2006 highs. Those who lost their homes or are unable to get a foot on the property ladder are left paying all-time record-high rent prices.

    The long-running bull market has more to do with the Federal Reserve's $85.0-billion-per-month stimulus package and artificially low interest rates. Real economic recovery is rooted in economic growth and jobs, not downward revisions.

    Over the last week, there was a raft of data that suggests that the U.K. is experiencing legitimate economic growth, that confidence is returning, and that sustained economic growth will be faster than expected.

    The UK Construction Purchasing Managers' Index (PMI), a measure of U.K. construction companies, grew at its fastest pace in three years, improving from 51.0 to 57.0 (a reading above 50 indicates growth). Residential construction increased at its fastest pace since June 2010, while business activity rose for the third month in a row. (Source: "Strongest construction output growth since June 2010, led by surge in housing activity," Markit Economics web site, August 2, 2013.)

    In July, U.K. manufacturing roared back to life at the fastest pace since February 2011-further proof that the economic growth experienced in the first half of the year is expected to continue. The UK Manufacturing PMI climbed to 54.6 in July, versus 52.9 recorded in June. Anything over 50 shows sector expansion, while anything below that indicates contraction. (Source: "Growth of UK manufacturing production and new orders surges higher in July," Markit Economics web site, August 1, 2013.)

    Further evidence that economic growth in the U.K. is in full swing: June unemployment levels fell at their quickest pace in three years, dropping 21,200 to 1.48 million, the biggest drop since June 2010. The unemployment rate in the U.K. currently sits at 7.8%. (Source: "UK unemployment falls by 57,000 to 2.51 million," BBC web site, July 17, 2013.)

    While there is a lot of work yet ahead for the U.K., the current level of economic growth is a great sign. For investors wanting to take advantage of mature markets, they can consider ETFs that have large exposure to the U.K., like the iShares MSCI United Kingdom Index (NYSEArca/EWU) or the First Trust United Kingdom AlphaDEX (NYSEArca/FKU).

    Investing is about taking advantage of emerging opportunities. And right now, the U.K. might be one of the brightest economies out there.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Daily Gains Letter is a team of Investment Strategist. This article was written by John Whitefoot, one of our Editor. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

    Aug 08 8:37 AM | Link | Comment!
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