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Posts Tagged ‘Investing’

All is OK when it comes to the stock market. Wall Street is urging you to jump in with both feet and get fully invested. The market is going to the moon. Foreclosure mess? Not a problem says the street. Unemployment? We are already use to it and not a problem. Just name the problem and you get the same answer. I guess to be fair the same could be said for anyone holding the same position as I. At some point, however, the risk tips the scale.

I would look at jumping into this market as the opportunity to run down the prosperity with your neighbor who has been making big bucks in the market. Just have one question when it comes to running after your neighbor. What if you are running down a road that eventually leads to a steep drop-off?

OK, candidly, I have not been right on this current advance at all. However, something could be occurring right now that is characteristic of how most big advances end. In the world of managed money and technical analysis it is called a “blow-off” top.

A “blow-off top” is defined as a rapid increase in price of the stock market that precedes a steep drop in price. It doesn’t always have to precede a change in direction. However, in many cases it does.

Playing blackjack, poker, etc., offers a great example of what this looks like. You get a hot-hand at the blackjack or poker table and feel like you are invincible. You are winning hand after hand. Then you start to lose a hand or two and then the trend reverses. After you know it, you have given back all that you won. The house always wins.

I think that the same applies to the market in this type of environment. Without a Plan B, (what you use when Plan A doesn’t work) most investors make money and then give it back.

Let’s look back to 2007 as a good example. Starting on 8/15/07, the market started a real nice bullish market rally (it went up). This ended October 9th, which marked a top in the stock market that, I believe, will be the highest level this stock market will see for many years to come. It went up 11% in 55 days.

Fast forward to today (as of the day this was written) – On 08/31/10, the market started a real nice bullish market rally. Thus far, it has been 53 days and the market has gone up 13%. This is not unusual by any means to see the market have such a big rally that should precede a pretty substantial market drop.

What do I mean by substantial market drop? I would say that a minimum from where we sit today would be a 26% to a 40% decline in value. Although that doesn’t even seem possible at this juncture there is plenty of evidence that would suggest that it is more than possible.

At the risk of sounding like a broken record, watch your risk levels.

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Since we changed the daily stock market outlook to a stock market alert format, there really hasn’t been much to “alert” you about concerning the markets.  So, I thought I would just start off this Monday with a quick update.  This should be a relatively quiet week with very little breaking economic reports being released.  Since May 8, the S&P 500 has dropped about 50 points.  From the standpoint of what the S&P 500 has been doing over the past 9 weeks, that really wasn’t that big of a deal.  I want to circle back around to the one question that every investor should have in the forefront of their minds.

Is this the start of a new bull market or just a bear market rally that precedes another bear market route?   The answer to that question would determine every decision you make concerning your investments.  The best way to start answering that question is by looking at price levels.  If you are new to this market commentary, price levels are very easy to understand.  First, I always focus just on the S&P 500 and we always look at what price level the S&P 500 closes at each market day.  The S&P 500 closed on Friday at a price level of 882. 

Price levels are road markers that tell us where we are on the journey of investing.  If we successfully pass the right price levels, then we know we are on our way to our destination.  However, if we start passing road markers or price levels going backwards (losing money), we need to assess if we are lost and off of the correct road.  So, we look at the price levels that represent caution, a positive outlook for our journey, or a negative outlook. If our road markers are showing that we are on a good road, then we stay the course.  If the road markers (price levels) are starting to show yellow signs or caution, then that means we might need to change the course of our journey.  We do that simply by changing our investments.  If the road markers or price levels show we are lost, we want to change directions.

So, the road marker or price level that would warrant caution for investors is anything below 875.  Last week, the decline did not go that far.  A positive for the stock market would be anything over the price level of 950.  So, let’s see where a week of mild economic reports takes us.

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After reading, please offer your comments!

Of everything that I am writing right now, this blog might be the most important.  At the same time, it is the most difficult project that I take on.  The challenge is trying to write this information where it is relevent and understandable.  To further the challenge, I need to spend a lot of time building this site to include side information that you can reference.  The bottom line is that you can be a much more successful investor when you can understand risk and how to invest for it.  My goal is to teach that to you.  So, please stick with this resource as I work to build it.

Let me give you a practical example of what I am talking about when referencing risk.  Traffic signs are placed in the streets to keep us safe.  They tell us what speed we should be driving based on the conditions.  Obviously, we all want to drive as fast as possible to get to our destination quickly.  However, it might not make sense to do so.  There might be an increasing amount of risk involved with higher speeds. 

The goal is to get to our destination without crashing our cars or getting a ticket.

Sometimes the road is clear, we are on the highway, and we can drive the faster speed limits.  Sometime we have to drive much slower on those roads because of the weather.  It is dangerous to even drive the speed limit when the roads are slick. 

While pumping gas one day, I was watching people on the tollroad driving faster than usual in rainy and almost icy conditions.  Next to me was a State Trooper.  I asked him, “Why do people drive so fast when the weather is so bad?”  He said, “People think that they can drive the speed limit regardless of the driving conditions simply because the speed limit is allowable by law.  However, that is the speed limit for normal driving conditions and does not apply when the risk is elevated because of the weather.”

There there are times when we come across road construction.  When faced with road construction, we have a decision.  Do we detour and take another route or do we stay on the road?  Which is going to be faster?  If you take the detour, it might end up being a diseaster.  It might be that what you interpreted as bad road construction and delays was nothing more than a 2 or 3 minute inconvenience.  However, it might be that it wasn’t road construction but a major road construction shutting down the road for hours.

You are always making decisions and there is a risk that you will be wrong with every decision that you make.  The same applies to investing.  For most of us, the goal is to get to our investing destination as fast as possible.  We want to avoid the loss of time.  There is a real balance between risk and how we invest.

Sometimes the road is clear and the weather is fine.  If that is the case, you have smooth sailing ahead and can confidently take stock market risk.  Sometimes the economic weather turns bad and forces you to slow down or reduce the amount of risk that you are taking.  Remember you reduce risk in your investments by reducing the amount that you have invested in stocks.

Sometimes it just pays to be cautious because of the driving conditions.  Sometimes you see road hazards like the building real estate bubble and have to decide whether this is going to be a real problem (get out of the market) or stay on the road (stay invested).

I want to teach you how to read the traffic signs of investing by teaching you how to understand price levels in the stock market.  If you can at least understand price levels, you will be so much further ahead than the majority of investors. 

Let’s talk about yesterday.  The stock market is in the process of trying to figure out which direction it wants to go.  Part of the day the market went up and part of the day it went down.  At the end, the market finished with a nice day.  So the price levels we have talked about still stand.

The price level that the S&P 500 finishes the day at is what we are watching.  Anything about 825 is positive.  Anything below 800 is neutral.  Anything below 741 is very bearish.

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