Diversify your stock and bond portfolio with non-correlated medium to long term trend following futures systems.

- Tom Reavis

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June 13, 2007

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The financial well being of many Americans would greatly suffer from a large drop in the stock market. This is particularly true for the huge portion of the population that is rapidly approaching retirement age and is depending on the gains achieved in the market over the last five years. Many people feel that they are protected because they have a “diversified” portfolio into different industry sectors or groups. Some feel that they have some protection because they have their money in growing economies out of the United States like China or India. In fact, nothing could be farther from the truth. Three out of four stocks move in the same direction as the Indexes. We are now a world economy. When someone sneezes in China the American stock market catches a cold. What American investors must do to protect themselves and increase stability to their stock and bond portfolio is to add ALTERNATIVE INVESTMENTS . By definition, these are investments that have a very low or negative correlation to the standard stock and bond portfolio. From January 2003 to January 2007 the amount of money invested in managed futures soared from $54.7 Billion to over $170 Billion. That increase of over 300% in just four years makes managed futures one of the fastest growing asset classes in the world. What do fund managers and professional money managers know that the average investor doesn’t? There are an abundance of studies that demonstrate that a portfolio of 20% managed futures and 80% stocks and bonds both increased profitability and decreased volatility or risk over the standard stock and bond portfolio. Historically, when the stock market moved up, the value of managed futures increased. The real value of managed futures occurs during periods of substantial drop in the value of the standard stock and bond portfolio. During those critical periods the value of managed futures has actually increased, thereby, offsetting some of the losses and stabilizing the portfolio as a whole. The most successful managed futures have been divided into two camps. One is the option premium sellers. The other is the trend followers. In my thirty plus years as a Member of the Chicago Mercantile Exchange it is my opinion that the most successful traders are trend followers. I believe there are two ways one can take advantage of this strategy. One should either select a CTA that has an impressive track record trading a trend following approach or find a medium to long-term trend following system to trade.

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Those of you that follow Fast Break consistently may be surprised to find me recommending strategies to protect against a substantial break in the Stock Indexes. In my last writing dated April 24th 2007 I forecasted a big bull market rise in the stock market that would continue through at least the end of 2007. I also said that I felt that inflation was not going to be our main worry and that the escalation of the sub-prime market concerns would force the Fed to cut interest rates at least twice by the end of the year. We have seen an impressive bull market with the S&P rising $3700 per contract for a 21% return since then and the Dow rising an even more impressive $4610 per contact for a 82% return. However, some feel the bull market has been too much too fast. While I still like the “Goldilocks Scenario”, the economy is neither too hot nor too cold, the Fed seems to continue to dwell on the possibility of inflation. The fat lady has yet to sing but in the last week concerns over the sub-prime lending market at home seem to have given way to concerns over an over–heating world economy. Ten year notes are sitting right off a five year high yield of 5.25%. A run above this level would be a damaging psychological blow to the already injured Bond bulls. Keep in mind that historically interest rates above 6% tend to put the lid on bull markets in the Indexes. At that level I think you will find investors preferring a safe haven in bonds rather than betting on a stock market with weak GNP growth and an ailing housing market.

If you cannot view the Weekly S&P chart, go here.

Perhaps the rules of the game are changing and we have become such a world economy that the booming economies in Asia, Europe and South America are seen as the primary factors guiding our bond rates. The European Central Bank raised its rates last week. Can we leave our bond rates unchanged as countries around the world are raising rates to fight inflation? However, domestic consumer confidence this week hit a 10 month low. With higher gas prices and falling home sales America is teetering on a recession with an anemic looking 0.6% GDP growth rate. Today, RealtyTrac announced foreclosures are up an astounding 19% over one year ago. Where is the driving force of inflation the Fed is so concerned about? The CPI comes out Thursday and the PPI comes out Friday. These reports should give us a better idea on where we stand domestically.

If you cannot view the Weekly Ten-Year Notes chart, go here.

Technically the markets are in a precarious position. After making a new all time high last Monday the markets tanked for three consecutive days on heavy volume. If the markets take a breather at these levels it is going to look ominously like a giant double top. And that is not good. Don’t get me wrong. I’m not a bear--far from it. But, if we are going have higher interest rates at this critical time all bets are off. If the Fed is correct and we are going to see domestic inflation then opportunities should increase dramatically in commodity futures. I can see grains, metals, energies and financials all making substantial moves. Proven medium to long-term trend following systems should be able to capture these moves and possibly offset a fall in equities

Thomas J. Reavis belongs to an elite class of brokers. For over 30 years, he was one of only 625 full members of the Chicago Mercantile Exchange (CME). He has been an independent trader and market maker in the “pits” since 1973.

In 1994 he began to direct his experience, market knowledge and market “feel” to managing money for investors and studying and evaluating the best trading software available. A strong reliance on sound trading principals, the ability to stay calm, think clearly and “follow the plan” in high pressure situations and excellent money management skills are the tools which have continually made him successful and continue to make him one of the best futures brokers and specifically, one of the best system trading brokers.

He has actively traded on the floor of the Exchange in the Cattle and Hog pits, the Deutsche Mark and Swiss Franc pits, and the Standard and Poor’s 500 Index. His close friendships and professional relationships established with filling brokers over three decades aid in providing his clients the very best trade execution. His ability to actually go into the pits to personally execute orders and solve problems has proven invaluable to his clients.

Tom understands the goals and acceptable risk levels of his clients vary greatly. Good communication allows him to understand and serve the best interests of all his clients whether large or small.

Trade Like A Professional!

Register now for a 2-week complimentary subscription to one of the world’s most sought after daily market letters! News, charts and trading ideas to make you a more successful trader. Also receive a complimentary 30-day simulated trading account using one of our state-of-the-art trading platforms. Hone your trading skills without risking your money. Practice makes perfect! Sign up now!