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Posts Tagged ‘trends’

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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The objective of this daily stock market outlook is to help educated you on how risk and stocks work.  Although it is not always easy to take something like investing and make it understandable, this is my objective.  So, please work with me to learn this information.  If you have not done so, please read this post about price levels and trends.  It will be helpful for you as you start to learn this information.  I always welcome any feedback. 

With yet another price decline today, it leaves you contemplating one question.  At what price level will the S&P 500 stop losing value?  Today, the S&P 500 lost another 1% finishing at a price level of 676.  We are 56.8% below the all time high of the S&P 500 set in October 2007.  That does seem like an eternity ago.

In looking at all of the analysis, I have come to the following conclusion.  The good news is that I do feel we are close to that bear market rally.  The bad news is that we might have to decline another -18% before we get there.  If you are a trader, that might be an excellent point to invest money for a 30% plus gain.  I do feel that this bear market rally that we are certainly due will be a scorcher. 

If you are wanting to reduce risk in your portfolio (reduce the amount of money invested in stocks), then this should provide an excellent opportunity to get back some of the loss and start selling stocks.  No, I don’t think that will be the bottom. This is why I still think that it will be important to reduce your risk down to a level that you are comfortable.  Remember, you can accomplish that by reducing the amount of money that you have exposed to stocks and stock-based funds.

This continues to be a very dangerous stock market like none we have seen since the 1929 to 1932 bear market.  Invest very carefully.

Update Tuesday Morning 3/10/09

Markets look good right out of the gate this morning with the S&P 500 on its way to test the price level of 700.  If the market can close above that price level (700), that would be a real positive.  Then we would want to see some more of the same over the next few days.

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