Don't Buy or Sell This Market

Last week, I looked at whether or not the market is a buy, and I concluded that it isn't because it remains overvalued, even after the May correction. If there is limited opportunity being long, can investors score big by being short? Using ETFs such as the ProShares UltraShort S&P 500 ETF (NYSE: SDS  ) , it's very easy to express a negative view on the market. With investors backing out of risk assets since the end of April, this trade looks superficially appealing.

Swimming against the tide
In fact, I don't recommend it for several reasons (not to worry -- I provide some other investment ideas below). To begin with, shorting the stock market is a very tricky game. The long-term trend of the market is up, so instead of making an ally of time, it works against the short (i.e., the value of the companies in the index is gradually increasing over time, which hurts the short). Besides, the market isn't absurdly overvalued right now.

Furthermore, "short" ETFs are structured for short-term traders, not investors. Indeed, the daily returns on ProShares UltraShort S&P 500 are supposed to equal twice the inverse of the daily performance of the S&P 500. If you believe you have an advantage in terms of anticipating market moves on a short-term basis, by all means, go ahead -- but I must warn you that your odds of success are low.

Other ideas to make money
If you can't buy or short market, what's an investor left with? Look for niches of value within the market or look at other markets altogether. In the former category, I would suggest looking at high quality companies that pay a solid dividend (see below). This group of stocks is well priced and the dividend return offers protection against potential macro risks (deflation, double-dip recession, etc).

Company

P/E Multiple (2011e)

Dividend Yield

Merck (NYSE: MRK  )

9.2

4.3%

ExxonMobil (NYSE: XOM  )

9.1

2.8%

Kraft Foods (NYSE: KFT  )

12.8

3.9%

Procter & Gamble (NYSE: PG  )

14.5

3.1%

Source: Capital IQ, a division of Standard & Poor's.

It's a vast world out there!
In terms of other markets, why not consider the Vanguard Emerging Markets ETF (NYSE: VWO  ) , a low-cost way to take advantage of the higher growth in emerging markets. Many of these markets, such as Brazil and Korea, have made huge strides since the emerging market crisis of 1997-1998 in terms of their financial position. From that perspective, the big macro risks that used to spook investors don't pose anywhere near the same threat (those risks have migrated westward, unfortunately!).

Even in a tough environment for stocks, there are easier ways to make money than being short. Looking for pockets of value and investing internationally are both superior strategies for the individual investor.

Between high valuations and sluggish growth, investors can expect disappointing returns from U.S. stocks over the next several years. The good news is that there are alternatives for your money: Tim Hanson explains how to make more in 2010.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Procter & Gamble is a Motley Fool Income Investor selection. The Fool owns shares of Procter & Gamble, and Vanguard Emerging Markets Stock ETF. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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