Double Down on the Dow—For Now

06/04/2007 12:00 am EST

Focus:

Richard Lehmann

Publisher, Forbes/Lehmann Income Securities Investor

Richard Lehmann, editor of ETF Investor, says the boom in large-cap stocks should continue for a while and he recommends a leveraged way to play it.

This month belonged to the large-caps. The leader was the DIAMONDS Trust Series I (AMEX: DIA), which is, in essence, the Dow Jones Industrial Average, gaining [more than] 5.57%. Two PowerShares funds made the [best performers] list, the PowerShares Dynamic Deep Value Fund (AMEX: PVM) gained [more than] 3.98% and the PowerShares Dynamic Large Cap Value Fund (AMEX: PWV) gained 3.67%. TriContinental Corporation (NYSE: TY), one of the oldest closed-end funds, made the list for the second month in a row, gaining [more than] 4.58%.

The large-cap trend seems to be real, with the Dow out-gaining both the Standard & Poor’s 500 and the NASDAQ-100 Index Tracking Stock (QQQQ) in the past year. The quality of the earnings of large-cap multi-nationals is suspect, [however], because of the effect of currency translations due to a poorly performing dollar.

The large-cap boom is reminiscent of the NASDAQ bubble that ended in 2000. This bubble was first identified in 1997 yet continued for three more years, proving that the bursting of the bubble is hard to predict. But it proves that the longevity of such bubbles can often last for years and are worth taking advantage of. There is a lot of global liquidity in the market right now and China is magnifying this by moving its dollars out of US treasuries and into the equity markets. Also, private equity firms are buying up companies and may be causing a supply demand/imbalance, which is contributing to higher prices.

Our recommendation for this month is the Ultra Dow 30 ProShares (AMEX: DDM). This ETF is part of the ProShares family of funds. It provides double the return of the Dow by using options, futures and investment contracts. The accuracy of the claims has been historically validated and it does indeed provide double the return. There are risks in buying the “double up Dow”; mainly, a sharp correction will hurt twice as much. After all, “double up” also means “double down.”

In conjunction with the purchase of the Ultra Dow, we recommend a 6% stop loss be entered at the same time, just in case.

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