A Great Time to Be in Cash

08/25/2011 8:30 am EST

Focus: ETFS

Doug Fabian

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

Sometimes staying out of the ocean is better than fighting the tides, writes Doug Fabian of Successful Investing.

The wild volatility two weeks ago wasn’t matched last week, but you wouldn’t know it by looking only at Thursday and Friday. Those two days saw some very hefty selling, and the 419-point Dow drubbing on August 18 showed that the fear factor in this market is still very much alive.

That week, the Dow dropped 4.01% while the S&P 500 sank 4.69%. The Nasdaq Composite was hit the hardest, plunging 6.62% over five trading sessions.

The heavy selling late in the week came after more news out of Europe that the region’s financial crises could infect banks all over the globe. Add to that the news here at home showing a weak economy, a weak housing market, weak employment numbers and falling bond yields, and you have more fuel stoking the bearish flame.

In fact, many market observers now are talking about a double-dip recession in the making, and that will not be good for the bulls going forward

It’s nice to be completely out of stocks when the market is in full retreat mode. In fact, since we received our August 2 sell signal, the S&P 500 has dropped 10.41%. That’s the kind of damage to your serious money that our plan was designed to guard against, and I am very pleased that we’ve done just that once again.

Now, three weeks ago we mentioned the possibility of using a bear-market fund such as The Active Bear ETF (HDGE) as a tactical position to help us make money while the majority of our capital remains in the very attractive safe haven of cash.

I was actually hoping for a bit of a bounce in stocks last week so that we could get in on HDGE at an attractive price point. However, the downbeat trade on Thursday and Friday caused HDGE to spike up a bit too much for that attractive entry price to develop.

If we do get a bounce this week, we will look to buy HDGE. That spike could come this week, especially if the Federal Reserve comes out with some kind of hint of QE3 when it conducts its annual meeting in Jackson Hole, Wyoming. [The big bounce on Tuesday, which came just after this was written, and then Wednesday’s further advance probably fits the bill—Editor.]

Friday will be a big day to watch this week, as that’s when Federal Chairman Bernanke makes his speech at the annual conference. We’ll see what takes place then.

For now, stay safe and sound in one of the best asset classes you can be in right now—cash.

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