Investing in This Equity Market Takes Nerves...

Note from Managing Editor Sara Nunnally: Investing in this market takes nerves… and smarts. It’s hard to know what action to take when the markets and economic news don’t match up.

Jared does a great job explaining the real movements behind our economy and in the stock markets. You saw this in yesterday’s article on the VIX.

That’s why I wanted to share with you his article from WaveStrength Options Weekly. It is just a portion of the full alert, but you will find some great insights about the value of the U.S. dollar, the stock market and commodities.

WaveStrength Options Weekly subscribers can find the full article online…

Holding Our Ground (And Our Nerve)

I believe it’s my job to guide you through the fog and waves of information, but I must admit that the chore has gotten extremely difficult recently. I feel like I’m taking “crazy pills”! Every morning I wake up, read the overall dismal economic news and mediocre earnings reports, and then watch the equity markets climb higher.

Of course there are reasons for just about every occurrence in the stock market. When you have a plethora of conflicting indicators, it can become hard to navigate effectively; this is what is happening now. Imagine having five GPS devices and each of them pointing in different directions to get you to your destination. Although there may be nice scenery along every route, the distance, weather and terrain are unique with each. We are looking for the safest and most efficient route.

As I have explained in past issues, much of the strength in U.S. equities can be attributed to both relatively low price/earnings multiples, but maybe more so to the weak U.S. dollar. Major media outlets are finally starting to admit this… Many “American” companies reap the bulk of their earnings globally in other currencies, then convert and report those foreign earnings in U.S. dollars. The weaker the U.S. dollar gets, the stronger their earnings become. The average American is not living high on the hog, like some stock prices seem to imply. The sad part is that it is not about America anymore…

Take a look at the chart below (SPY in black, dollar index in red) — you can see the high inverse correlation between the two.

View Larger Chart

What I can tell you is that we have to really know when to hold em’ and when to fold em’ in this environment. For some of our older bullish positions that may not look too promising, it may be time to fold (for breakeven or a slight loss) and move on.

For others, we will have to keep our wits about us and hold our ground for the moves that we are looking for. The opportunities in this market will come and go fast, so we have to be alert.

I know it can be frustrating, but in times of euphoria, excitement and confusion, we must remain calm and resolute (without being foolish). It might help to remember this scene in Braveheart; it can be extremely rewarding to keep your composure, even at the most stressful of times.

The equity market’s behavior is extremely difficult to read at present. Corn, wheat and other commodities remain elevated with corn and wheat prices also being driven by weather in the Midwest. Gold and silver are making record highs due to dollar weakness and global economic fear. These investment trains have already left the station; we will wait for the next stop to jump on.

(Morgan Stanley and Goldman Sachs both have recently downgraded commodities in general.)

Earnings results have been a mixed bag with some looking decent and other not so great. Seventy-five percent have beat expectations, but remember that estimates have been conservative for the most part and forward guidance is not spectacular.

(By the way, investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Sara Nunnally simplify the stock market for you with our easy-to-understand investment articles.)

Travel and consumer discretionary stocks are still getting support (and still rallying) here, but there is big short interest brewing in many of them. On April 24, Seeking Alpha offered great insight on these “bubble” stocks as well as OPEN, in which we are positioned appropriately with a put.

From Seeking Alpha:

As the stock market starts discounting the end of the Fed’s QE2 coming in June, along with possible spending cuts and austerity programs in Washington, investors should steer clear of momentum stocks such as Netflix (NFLX), Lululemon Athletica (LULU) or Open Table (OPEN), which could rapidly lose their mojo and suffer sharp declines in market prices.

I feel confident in most of our positions and our strategy to only buy stocks that are relatively cheap on a valuation basis and are not looking like “bubbles.” I am also looking for lower beta stocks that aren’t going to get extra volatile if the market does indeed break down. As unsexy as this may seem now, I would rather us have decent profits, rather than disastrous profits.

(NFLX reported earnings yesterday and was moving lower by 5% in the pre-market at the time of this writing.)

The Fed Show

Wednesday is a big day for the markets and a new experience for our friend “Helicopter Ben” Bernanke as he will address the world via a press conference after the Fed gives its decision on interest rates. This is the first time that the Fed will offer a press conference, and we should expect it to be choreographed like Swan Lake. The wild card(s) will be the questions asked and how they are structured.

The Fed is even trying to keep questions under control, by only allowing attendance to individuals who represent news organizations accredited by Congress and only one person per organization. Even with the limited audience, I think we could see some volatility come out of the report. I suspect it could be a bearish afternoon Wednesday, but the way the market is behaving it’s really hard to draw a realistic conclusion.

Editor’s Note: Jared’s subscribers are already raving about the job he’s been doing as the new head of WaveStrength Options Weekly. His simple options strategies are meant to help investors reduce risk while still making decent profits. Learn more about his options trading strategies.

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