Play the Stock Market With The SPY Exchange Traded Fund

Market Summary

The stock market remains in a full-blown bullish trend as investors are discounting negative data and celebrating positive news. The market is always somewhat disconnected from Main Street and usually the market gets it right when reflecting future political and economic events in current prices. Investors don't believe that the people who sit in the White House and Congress are stupid enough to let another recession happen anytime soon. The market for now is telling us that employment is growing at a decent pace in the private sector and the economy is actually improving. The market told us politicians would not let us fall over the fiscal cliff at the beginning of the year and it didn't happen. The market is saying the upcoming budget and debt ceiling negotiation will be resolved. The market could be totally too optimistic and get it all wrong, but for now stock prices are at multi-year highs with room to go higher.

Investor Analysis

The entire year has moved in the same direction as January results in 61 of the last 84 years, or 72.6% of the time. The so called "January Effect" is even more pronounced in years when the markets end up higher in January. Of the 54 time that January has been up since 1929, the year has ended higher 43 times, or 79.6% of the time. As discussed in the most recent Investor Report newsletter, with treasury bonds not supplying the returns investors want, they are putting their money into stocks. Take a look at the SPY ETF (Exchange Traded Fund) daily chart below. You can easily see how after the stock market hit bottom in mid-November, the SPY ETF has gained over 100%. Stocks have basically gone straight up. The end-of-year political drama over the "fiscal cliff" and investors selling stocks to avoid higher 2013 tax rates caused prices to end 2012 on a down note. But since the New Year started the stock market has been on fire.

Possible Strategy

Invest in the SPY ETF to take advantage of broad-based stock market gains. The SPY is an exchange-traded fund (ETF) managed to track the Standard & Poor's 500 Index (S&P 500). The investment seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index. By trading like a stock, the SPY has continuous liquidity, can be short sold, bought on margin, provide regular dividend payments and incur regular brokerage commissions when traded. The SPY is used by large institutions and traders as bets on the overall direction of the market. They are also used by individual investors who believe in passive management (index investing). In this respect, spiders compete directly with S&P 500 index funds. Smart investors looking to benefit from the stock market recent price surge and limit the downside risk are stepping in to buy when prices pull back a bit so that they can get shares at a cheaper price.

 

By Gregory Clay