It was 1989 when Cher’s “If I Could Turn Back Time” climbed the charts. Her song topped the charts in Australia and Norway and became a top 10 hit in ten other countries. Earlier in the 80s, her record sales had evaporated and TV ratings disappointed. “If I Could Turn Back Time” was seen as a major comeback for Cher.

Exactly 20 years later, investors wish they could turn back time, stage a comeback and resurrect their out of favor portfolios.

I am not a Cher fan per say, but her story shows that fortune’s can be reversed. Following her comeback, Cher went on to become an enduring pop icon and one of the most popular and biggest-selling artists in the history of contemporary music.

It is not too late for investors and retirees to turn their wounded portfolios into a growing and enduring source of income – without turning back time.

Swim against the stream

Take a moment to visualize the pervasive atmosphere of 2007. Predominantly good news and overly optimistic news coverage made the future look bright. The Dow Jones (NYSEArca: DIA) crossed 14,000 for the first time ever, producing the general consent that the bull market was here to stay.

Rather than giving the stock market credit for executing the bait-and switch game to perfection, it would be more accurate to point out that investors simply have not figured out how to interpret the signals of their peers. How so?

Broad market indexes such as the S&P 500 (NYSEArca: SPY) serve as a composite barometer of investors perception. In fact, the stock market is the most accurate reflection of perceived value. Any stock is only worth as much as investors are willing to pay – the perceived value.

The perceived value rises along with positive news and declines along with negative news. News-induced buying/selling further intensifies price extremes. Perceived value is always highest at the top and lowest at the bottom.

$100/share for a dot.com company with no earnings – which drove the Nasdaq (Nasdaq: QQQQ) and Technology Select Sector SPDRs (NYSEArca: XLK) to all-time highs – might be just as inappropriate as $5/share for GE (NYSE: GE), the oldest and only original DJIA component. Nevertheless, that’s where supply and demand met to determine the price.

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Investor’s perception is driven by investor sentiment and news. Investor sentiment is probably the most treacherous force on Wall Street as it is the stock market’s closest ally in bait-and-switching investors out of their money. Optimistic sentiment often signals a top while pessimistic sentiment can be indicative of a bottom.

Case in point: According to Hewitt Associates, stocks made up 69% of 401(k) assets at the market’s all-time high in 2007. As the stock market bottomed in March 2009, stocks took a back seat to bonds and cash for the first time ever. Only 48% of 401(k) funds were allocated to stocks in February ’09.

The ETF Profit Strategy Newsletter referred to the indicative properties of investor sentiment on December 15th, 2008: “Optimistic sentiment, which should be more visible above Dow 9,000, will give way to further declines. These should draw the Dow to below 6,700.” Two weeks later, the Dow topped at 9,100 and fell 2,600 points within 60 days.



Capitol Hill can’t fix it

Investment sentiment is a consent formed opinion as is the government’s. As such, both lag behind the trend and are trend followers rather than trend setters. In fact, the government’s actions often backfire, such as the 1999 decision to lower the minimal capital requirements for banks.

In recent history we’ve seen the illusion of a successful bailout #1 (TARP), successful bailout #2 (TALF), and many smaller initiatives in between, go up in flames. The Financial Select Sector SPDRs (NYSEArca: XLF) got burned every time a new rescue plan was revealed.

What reason is there to believe that the bank rescue program and Private Public Investment Program (PPIP) will be any different?

Yes, according to the news, the PPIP was received with double digit gains. A look at the chart however reveals that the market started to rally nearly two weeks before the PPIP was revealed on March 23rd. Subscribers to the ETF Profit Strategy Newsletter were made aware that a market bottom (between Dow 6,000 and 6,700) would be followed by the biggest rally since the October 2007 all-time highs.

The Public Private Investment Program (PPIP) is essentially just another bailout. The government has however discerned the public’s distaste for funneling tax payers money to financial conglomerates and therefore disguised it better. Even toxic assets are called “legacy assets” under the PPIP. Regardless of how you dub it, toxic is toxic and bailout is bailout.

Even if banks pass what’s been termed a “stress test,” it doesn’t mean that banks are solid. The worst case scenario stress test for banks and financial institutions is far away from reflecting a true worst case scenario. The worst case scenario assumptions are about as rosy as a Dow 11,000 forecast in 2007.

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The government’s attempt to save financial institutions can hurt investors in two ways:
1) The perception that TARP, TALF, PPIP and many others are working can trick investors into buying equities
2) Treasuries are likely to lose value. Due to the inverse relationship between price and yield, long-term Treasuries are more receptive to changes in yield. As the government sabotages its own financial condition, yields are likely to go up which will send prices down.

30-year Treasury yields have already rallied from their December low of 2.50% to over 4%. Subsequently prices have fallen. Long-term Treasury bonds such as the iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT), iShares Barclays 10-20 Year Treasury Bond Fund (NYSEArca: TLH), SPDR Barclays Capital Long Term Treasury ETF (NYSEArca: TLO) and others should be handled with caution.

Short-term Treasuries such as the iShares Barclays 1-3 Year Treasury Bond Fund (NYSEArca: SHY) and iShares Barclays Short Treasury Bond Fund (NYSEArca: SHV) are better alternatives. Even though short-term bonds bear a smaller interest risk, keep in mind there is still the credit risk which might become a big factor in 2010 and beyond.

Don’t just react – be pro-active

For decades, “investing” has been the strategy of choice to secure ones financial future. The Business Dictionary defines an investment “as money committed or property acquired for future income”. $10,000 invested for the future (in the S&P 500) in 1999 would be worth around $6,500 today.

How can you get your lost future back?

Buy-and hold as of recent has not, is not and will not be a successful investment strategy. The stock market’s wiggle action will continue to entice most investors to buy and sell at the wrong time (remember the 401(k) example above?). Rather than reacting to the market in an attempt to limit the damage, investors should be pro-active to beat the market.

Taking advantage of the market’s big gyrations is not difficult. On March 2nd, the newsletter recommended plain market index ETF such as the iShares S&P 500 (NYSEArca: IVV) high yield dividend ETFs such as the SPDR S&P Dividend ETF (NYSEArca: SDY) and leveraged ETFs such as the Ultra Financial ProShares (NYSEArca: UYG). All recommended ETFs are up between 35% and 110%.

While some money can be made by taking advantage of the back-and forth wiggle action, investors can earn their future back by combining the above mentioned strategies along with age-old, true Wall Street wisdom. This is not the kind of wisdom that sent Lehman Brothers and Bear Stearns into oblivion.

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Wall Street wizards use proven indicators such as P/E ratios and dividend yields as indicators to determine true value. Based on those indicators, the stock market is overvalued. How come?

An analysis of historic stock market bottoms shows that stocks do not bottom unless P/E ratios and dividend yields reach certain “trigger levels.” In other words, similar to ice, which does not melt unless the temperature climbs above 32 degrees, the stock market does not bottom unless those indicators reach a certain level.

Using past bear market levels (such as the Great Depression) along with current P/E ratios and yields, one can pinpoint a target level (we already did) for the ultimate market bottom.

Using investor sentiment along with a few other indicators, one can determine how far this rally will go before breaking to new lows. The March issue of the ETF Profit Strategy Newsletter contains a detailed analysis of P/E ratios, dividend yields and two other powerful indicators to pinpoint the ultimate market bottom.

Whatever you envisioned your future to look like, a pro-active approach might be the best option to earn your future back - without having to turn back time.