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Globe Investor Magazine online, February 10, 2009
The Source: Bob Hoye, editor and chief investment strategist, Institutional Advisors.
The Idea: Buy Horizons BetaPro S&P TSX Capped Financials Bull Plus ETF (ticker: HFU).
The stock market is poised for a "tradable" rally beginning soon and lasting into April, Mr. Hoye said in an interview. He already holds gold, metals and oil and gas in his model portfolio.
"We're in a banking disaster. Now is a good time to add financials." With bank stocks plumbing the depths and quarterly earnings coming out soon, it's a bold call. People who take his advice must be ready to sell when the rally has run its course, he says.
"The thing to understand is there is no long term. When you see some good daylight on a trade, you should take advantage of it."
HFU is a leveraged ETF, which means it seeks to double the daily performance of a market index. It's not suitable for buy and hold investors -- it is better for traders. Leveraged ETFs are highly speculative and very risky because they magnify both losses and gains on an index.
Long-term investors who have been holding their stocks throughout the market turbulence should get set to sell into the rally, Mr. Hoye advises. "Disregard what you originally paid for the stock."
Sound advice? Consider the Crash of 1929, which Mr. Hoye does often. He draws his market forecasts from history, which he believes repeats itself more or less over long cycles covering many years.
After the fall of 1929, the stock market rallied, regaining 50 per cent, only to fall off a cliff later, he notes. The Dow Jones industrial average peaked at 381 in 1929 then tumbled to a low of 195 in November of that year. By April 1930, it had climbed back to 294. It sank to a low of 42 in 1932. "People who bought at the high in 1929 waited until 1955 to break even," he says.
Mr. Hoye thinks the market is tracing a similar pattern this cycle, heading for a fall of 80 per cent or so, peak to trough.
How will you know when to sell? When political and business leaders start patting themselves on the back over the apparent success of their economic stimulus program, Mr. Hoye says. He does not believe the plan will work.
The Payoff: If things turn out, traders could pocket a tidy capital gain in a few short months. Investors who sell into the rally might spare themselves some future anxiety if the market turns down again.
The Risk: The rally might not materialize and you could lose a pile of money. And because this ETF is leveraged, any losses will be amplified. Even if a vigorous rally occurs, you could sell to soon - or too late.
Why listen to Bob Hoye?
Mr. Hoye and his colleague Ross Clark of ChartWorks have made some timely calls. Mr. Hoye was almost alone in forecasting that the U.S. dollar would strengthen even though the U.S. economy was tanking because that's what it did in previous financial blowouts. He advised his clients to take shelter in five-year U.S. Treasury notes last summer, before the stock market and the Canadian dollar tumbled.
Special to The Globe and Mail
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