Following the Smarter Money Lower

If you caught the market action Friday, you already know that the fear among global traders that had been churning under the market's surface has now bubbled to the top. Sure, we've endured some wild swings in the market lately, but Friday was different, because the currency and commodity traders started to get nervous along with their always-jittery, often-downright-craven cousins, the Wall Street stock traders. During the past few months I have claimed that, since the euro/dollar (how many U.S. dollars it costs to buy one Euro) has hovered consistently around $1.45, concerns of a Greek default (and subsequently a Spanish and Italian meltdown in the bond markets) were merely traders looking for an excuse to sell U.S. equities. Also, I have maintained that the fears of a U.S. double-dip recession were overdone because oil prices have remained stubbornly high. These two more accurate predictors of future unpleasantness than stocks, the currency market and oil futures, began to turn lower Friday, which means that the smarter money has begun to show concerns that a default in Greece will, within the next year, cause a contagion similar to the Lehman plague from a few years back, from which we have yet to recover.

The euro/dollar plummeted Thursday and Friday from $1.45 to $1.36, which by currency volatility standards, is an enormous move in two days. Less spectacularly, light sweet crude oil, now called West Texas Intermediate (WTI) to confuse everyone, traded between $89.50 and $85.64, which although still stubbornly high if we are indeed headed into another recession, nevertheless is moving in the right direction if we are about to see a European contagion induced double dip, which is, of course, the wrong direction for the handful of us who are long stocks. Here's what to watch. If the euro/dollar dips below $1.30 and stays there for an extended period of time and if WTI falls to a 70-handle and closes there, that means the smarter money believes the whole European contagion issue is more than just a media event on CNBC. That's when stocks will see even deeper declines (and fast) than we've been enduring this summer. If you are assembling the (almost) permanent portfolio as I am, you'll want to take advantage of the market turmoil by initiating or adding to existing positions of strong, large, cash-hording, dividend-paying U.S. multinational stocks, such as General Electric (GE), Pfizer (PFE), and RPM International (RPM), all of which I have recommended previously.

Last week I recommended RPM as a stock that has raised its dividend 37 years consecutively and that has an impressive list of global and industrial brands, like DAP and Rust-oleum. In the interest of full disclosure, I must tell you that Friday, in the midst of the market mayhem, I traded that stock successfully by buying a whole bunch of shares at $17.75 early in the afternoon and selling my shares at 3:57pm for about $18.05. This sort of trading, which is not really day trading, because I only traded with a relatively small percentage of my portfolio (and not all of it), is only for those of you with cash you are willing to have trapped in a stock for a long time, in case the trade does not work out in your favor. For the short-term trade I find a stock that I have wanted to own for a while with a strong dividend, a stock like RPM, that I would be willing to add to my (almost) permanent portfolio if the stock falls precipitously, and I buy many, many shares during the day at a time of extreme panic in the market (in Friday's case resulting from rumors that Greece was going to announce a default on its debt this weekend, which still hasn't happened yet at the time of this writing). I will sell the stock, all of it, that I'm trading once I have reached a predetermined profit on the trade (minus commissions and fees, which should be under $10 per trade if you're using the right broker). This sort of trading is not for the meek, especially in these uncertain times. Some call this gambling; I call it trading.

You are probably better off to keep adding to solid positions that you are willing to keep (almost) forever. This week we may see a European meltdown, and I might use the volatility to trade RPM again because my guess is that Germany does not want to cast out Greece, its prodigal son, yet, from the Euro zone; Germany will probably wait until later this month or October, when most stock market crashes seem to occur. If that happens, I'll roll up my sleeves and buy, buy, buy.