Your Next Profits …

Two weeks ago in my March 16 issue titled, “Early-bird Profits: Grab Your Share Now” I told you in no uncertain terms that …

A powerful, multi-month rally in the Dow Jones Industrials, the S&P 500, the Nasdaq, and the Hong Kong and Shanghai stock markets was about to begin

The U.S. dollar was topping out and headed back down in a long-term bear market

Virtually all natural resources, including gold and oil, were poised for significant rallies

Most importantly, I gave you three great ways to play what I saw unfolding …

1. The Dow Jones Diamonds (DIA), to take advantage of a rally in stocks

2. The iShares FTSE/Xinhua China 25 (FXI), to capitalize on China

3. The Energy Select Sector SPDR (XLE), as a way to play oil

Since that issue …

The Dow Jones Industrials Index is up more than 9.8 percent

The Shanghai Composite is up 9.7 percent

Oil has jumped 14.8 percent — almost $7 a barrel

And the investment vehicles I recommended are on fire, too …

The Dow Jones Diamonds (DIA) is up 9.4 percent

The iShares FTSE/Xinhua China 25 (FXI) is up 11.3 percent

The Energy Select Sector SPDR (XLE) is up 9 percent

All in just two weeks’ time! Not bad. More gains are coming though. I’ll explain why in a minute.

The Importance Of
Protective Sell Stops

First, if you purchased any of the above recommendations per my “Early-bird Profits” issue two weeks ago, I recommend you place a protective sell stop at breakeven to reduce risk.

A “protective stop” is a sell order to liquidate an existing position you have if the price falls to a certain point.

For example, let’s say you bought 100 shares of the Dow Jones Diamonds (DIA) at $72.20 on March 16. You now have an open gain of 9.4 percent.

To place a protective sell stop, you would enter a good-till-cancelled order with your broker to sell 100 shares of DIA at $72.20 — your original buy price, which would represent breakeven on the trade.

That way, if DIA falls back to $72.20, your sell order would automatically become a market order, and your broker would sell you out of the position. You might get filled at $72.21, or $72.10, or $72.20 — depending upon market conditions at the time.

But the point is this: You have reduced your risk to virtually zero, excluding your broker’s commissions.

Tight money and risk management is the key to success in any trading and investing strategy. There will be times you get “stopped out” only to find the trade go back your way later. But remember this: You can always get back in a trade, or hop on another opportunity that comes along.

On the other hand, making your money back is infinitely harder to do!

In my Real Wealth Report, I instruct subscribers to use stops for nearly every position I recommend. And in the short-term futures trading that I do for myself, I never put on a trade without using a stop.

Where The Markets
Are Going From Here

Now, let’s take a look at what the markets should do next …

We’re in the early stages of a very powerful stock rally

Every indicator I monitor tells me this stock rally has legs. Mind you, there will be setbacks, some of which will be ugly. But over the next several months we should see the Dow climb back over 10,000.

Chief reasons …

A. As I reported previously, we have just witnessed the most oversold conditions ever in the Dow. That alone was enough to spark the rally.

B. Cycles continue to point higher. I showed you the cycle picture in the March 16 issue. Here it is again, updated.

Notice how the cycle pattern points sharply higher into the end of May.

C. The underlying fundamentals are improving. Mind you, the economy is not going to fully recover for years. But we are seeing some “bottom-bouncing” in some economic indicators.

New home sales jumped 4.7 percent in February … mortgage rates are actively being pushed lower, which should help boost housing even more … and durables goods orders for February jumped a sharp 3.4 percent.

At this point in this severely bad economy, any signs of hope should buoy the stock market.

More importantly, however, is Treasury Secretary Geithner’s public-private partnership and recent details he announced on the Term Asset-Backed Securities Loan Facility (TALF) program. While almost everyone is criticizing it, I believe, to the contrary, that it’s a brilliant program that will help both the markets and the economy.

Geithner (with help from the Fed) has essentially created a call option for private investors to come in a buy up toxic assets — for pennies on the dollar, with leverage of up to 20 to 1 provided by the Treasury and the Fed, and a guarantee on losses.

We can say all we want about how Wall Street messed up over the last several years and what a rotten bunch of people they are, and I don’t disagree with that at all.

But bringing Wall Street back in to help fix the mess and get credit flowing again is absolutely essential to any recovery.

Geithner’s plan does that with this new call option. It will bring private capital back into the picture, including institutions and foreign investors. This is a BIG plus.

So I recommend looking past the nit-picking and blame game, and instead, see the merits of his plan. It will help. And help for the economy is desperately needed.

Equally important …

D. Corporate earnings are reaching a bottom for this cycle. According to my cycle work, it could be “the bottom” for earnings; indicating a major improvement in the corporate picture going forward.

You can see it here in my cycles chart of S&P 500 earnings. Notice the tight correlation between the solid red line depicting the cyclicality of earnings and the black bars showing actual corporate earnings.

Also notice how we are within the timing window for an important cycle low in earnings.

Again, that does not mean that the economy will explode to the upside. It won’t, for a variety of reasons. But no matter how you look at it, if corporate earnings begin to improve, as I suspect they will, that’s a positive.

Also important …

E. The dollar is weakening. You can see it in this updated chart of the dollar that I have for you. Cycles point lower for the dollar into mid-April.

Since I last you showed you a dollar chart, the Dollar Index had its worst single down day since 1971 — ironically the same year the dollar went off the gold standard for good.

Already, as I’ve also pointed out recently, we’re starting to see calls for the dollar to be replaced as the world’s reserve currency.

Both the United Nations and China’s central bank are now putting forth proposals for a new world currency regime. Like it or not, it’s going to happen … and must happen for the world to survive this crisis. The monetary system will have to be changed.

Meanwhile, I urge you to cast conventional wisdom aside to realize that — whether we like it or not — our economy needs a weak dollar right now.

A strong dollar imports deflation. A weak dollar, on the other hand, imports inflation. And that’s what we need: A dose of inflation.

What’s the best hedge against a falling dollar?

The ultimate and time-tested currency: Gold!

So in addition to the foregoing recommendations on the Dow Jones Diamonds (DIA) … the iShares FTSE/Xinhua China 25 (FXI) … and the Energy Select Sector SPDR (XLE) — I would also strongly consider …

The SPDR Gold Trust (GLD). This Exchange Traded Fund (ETF) purchases gold on your behalf, and is very liquid, trading as an ETF. Each share represents 1/10th of an ounce of gold.

And for a bearish position on the dollar, also consider …

The PowerShares DB U.S. Dollar Index Bearish Fund (UDN). This ETF replicates the performance of being short the U.S. dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc — but without you going short the currencies.

Best wishes for your health and wealth,

Larry

P.S. For my ongoing thoughts and analysis … all buy recommendations … protective sell stops … flash alerts … special reports … and more, subscribe to Real Wealth Report. It’s a mere $99 a year, less than the cost of two cups of Starbucks coffee a month.

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