A VIP Allocation

10/22/2004 12:00 am EST


Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

For his VIP Investor program, Doug Fabian focuses on aggressive, non-diversified positions. His latest allocation places half of the portfolio into a "reverse" fund that rises when the Dow falls, and the other half to a precious metals fund. Here, he explains these portfolio moves.

"Rydex Inverse Dynamic Dow 30 (RYCWX ) is a bear fund that seeks to provide investment results that will match 200% of the inverse performance of the Dow Jones Industrial Average. The Dow has closed decisively below the psychologically and technically significant 10,000 mark for the first time since late August. This precipitous decline in the Industrials has pulled the index below both its 50-day and 200-day moving averages, triggering a buy in the Rydex Inverse Dynamic 300.

"This is a double-leveraged, ‘2 beta’ fund, which moves twice the inverse of the Dow. For example, if the Dow falls 2%, Rydex Inverse Dynamic Dow 30 rises 4%. In addition to the aforementioned technical factors, there are umpteen internal and external factors hitting the Dow right now. Many of its big components have been hit with unfriendly news, e.g., AIG, Boeing and Merck. Then there are the intangibles such as investor uncertainty over the upcoming presidential election and the harsh geopolitical tensions permeating the evening news.

"If technical selling and internal strife weren¹t enough negativity for the Industrials, they're also showing wear and tear from the almost daily record highs being set for a barrel of crude oil. The high cost of energy is taking its toll on stocks in the Dow, and many analysts feel more pain is just around the corner. Meanwhile, uncertainty and Wall Street don¹t play well together. With the election now in a virtual dead heat, uncertainty is the prevailing sentiment on Wall Street and it will likely continue to put a damper on the Dow at least until the first week in November. All of these factors form a confluence of pressure slapping the Dow down and giving us the opportunity to profit from its short-term pain."

"Rydex Precious Metals (RYPMX ) is a fund that seeks to mirror the performance of the Philadelphia Gold/Silver index. In just two weeks in gold has rendered VIP Investors an 8% unrealized gain. Just goes to show how little upside potential the broad market has right now with a wall of worry higher than the Empire State Building. With concern over economic growth, investors are seeking out safe-havens, and gold has a newfound luster. In the past four weeks the Gold Fund Composite has surged an amazing 17.08%. So what has been the catalyst for the recent rise in the price of gold and the mutual funds tied to its fortune?

"Well, lately it appears to be the flight-to-quality factors traditionally associated with investing in gold. What are those factors? Well, for starters there are those record-high oil prices. In the past month oil prices have pushed their way to new all-time highs. The potential negative effect on corporate earnings and rise in energy costs, has made equity investing an uncertain proposition at best, and has caused many to seek the golden shelter. Other factors contributing to the shine in gold include weakness in the US dollar versus rival currencies; the softness in the US job market; and of course, the ever-present uncertainty associated with geopolitical events.

"If there are two things that don’t mix well it is Wall Street and uncertainty. It’s no wonder then that gold—a traditional safe haven for nervous nabobs—is experiencing its recent glitter. Remember, gold is often an emotional buying decision for investors who view the metal as a safety net. Any time emotions are part of the equation, volatility rears its ugly head. So, we will see fluctuations from time to time. Meanwhile, the fund jumped above its 200-day moving average for the first time since April. The big jump in gold and related metals stocks provided the short-term momentum trigger I was looking for to give us the go ahead for a buy into Rydex Precious Metals."

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