If the Dow Falls and the Dollar Rises

05/30/2007 12:00 am EST

Focus:

Doug Fabian

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

Doug Fabian, editor of Successful Investing, says US stocks and gold appear ready to correct, while the battered greenback may be poised to rebound, and he suggests ways to play those moves.

There's no doubt that the Dow Jones Industrial Average has had a remarkable run over the past few weeks. But as the old song says, what goes up must come down. In my opinion, the latter half of that song's lyric is nearly upon us.

The brilliant run by the Industrial Average has now ventured into extreme-overbought territory. With a Relative Strength Index (RSI) value of nearly 74, and with the Moving Average Convergence/Divergence (MACD) lines both spiking up to nearly 190, even the most bullish market observers would be hard-pressed to argue that this market has a lot more room to run.

We already are seeing signs that this rally in the market is starting to tire, as small- and medium-cap stocks haven't kept up with the Dow's amazing run. And I got the sense from talking to many people at the [recent Las Vegas] Money Show that while they all are happy to participate in the recent upside in equities, they also are really nervous about just how long this bull market will last. They know we're in the midst of an economic slowdown, rising energy prices and a slowing housing market. They also know that these factors, along with the simple fact that statistically we are due for a sharp pullback, make for a very nervous bull going forward.

Over the short term, say the next several weeks or possibly longer, I think the real money will be made betting against a continuation of this uncharacteristic bull run in the Dow. That's why I am recommending that you [buy the Short Dow 30 ProShares (AMEX: DOG), an ETF that rises in value as the Dow declines [and vice versa].

Planning for the worst is the best way to protect your hard-earned gains, so don't be afraid to act in defense of your own dollars. I guarantee you'll be thanking yourself while everyone else is busy kicking themselves for not getting out in time.

[Meanwhile,] gold prices now have broken below their 50-day moving average, a clear signal that the time is right to short precious metals. If we see a continuation of this slide in gold and other precious metal prices, we'll continue the positive momentum we saw last week in the value of ProFunds Short Precious Metals (SPPIX).

(Editor’s note: short selling can be extremely risky and is appropriate only for investors who can afford to lose the value of their investment—Editor.)

On the dollar front, [we have seen a] recent up trend in the value of America's currency versus rival foreign currencies.  I fully expect this rise to continue, at least for the short term. I want you to continue building on this surge in the greenback via the PowerShares DB US Dollar Index Bullish (AMEX: UUP), since I think we have at least another 5% move to the upside in the value of the greenback.

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