Buy America, Short China
12/13/2007 12:00 am EST
Doug Fabian, editor of Successful Investing and ETF Trader, says the US stock market is attractive but that China’s domestic market isn’t.
We now have a Buy signal in domestic equities. I am recommending that you take the following new portfolio positions:
Buy the Vanguard Total Stock Market Index ETF (AMEX: VTI) with 30% of your total portfolio. Buy the iShares MSCI Pacific ex-Japan (NYSEArca: EPP) with 15% of your portfolio. Buy the Technology Select Sector SPDR (AMEX: XLK) with 10% of your portfolio.
These buy recommendations, along with our existing recommendation for a 20% allocation to the iShares MSCI EAFE Index (NYSEArca: EFA), should leave you 75% invested in equities with just 25% of your money in cash.
One thing you’ll notice is that we are actually overweight international equities, and this is based on the strength of economies outside the US. Our position in EPP is designed to take advantage of the booming economies and stock markets of Australia, Hong Kong, and Singapore. Our position in XLK is a sector play that is focused on what I think is one of the best areas in the market today, technology.
This is the first “clean” buy signal we’ve had since this current bull market began. We will look to put the remaining 25% of the portfolio that is now in cash to work after [this] week’s Fed meeting. If the Fed gives investors what it wants, we could be looking at a year-end rally that will blow us all away.
In the meantime, we are starting to see signs of a crack in China’s economy, and that portends well for our “China bubble” plays. I think we could be looking at an opportunity to capitalize on more downside, particularly in the China market, [by buying the] UltraShort FTSE/Xinhua China 25 (AMEX: FXP).
If you are an options trader, the way to take advantage of the “China bubble” is to buy the FXI May 2008 $170 Put (FVUQN). I think it is safe to buy this put option up to $19. (The current price of FVUQN is below $15—Editor.) If you put in an order to buy this option at up to $19, you should get it at an attractive price.
This put play in FXI is designed to give us a big gain in just a short period of time. We banked a near-27% profit in about three weeks with our last FXI put option. My goal is another big profit, and I think buying FVUQN gives us the best chance here for another substantial winner.
I know it’s tough to stay short in the face of heavy buying, but remember that what goes up must also come down—and with leverage on our side, what comes down will be literally twice as satisfying.