Investing In The Stock Market
The Smart Profits Report: Issue #440
Friday, July 20, 2007
Investing In The Stock Market: Three Factors That Could Buckle The Bulls
By Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research
“This has to be the top…” “Oh, this is definitely the bottom right here…” How many times have you heard these immortal words from people who boldly try to predict the market’s next move?
It’s a bad idea. The stock market is a lot smarter than most folks and often leaves bold prognosticators with egg on their faces. But that doesn’t mean that you should just sit idly by and wait for whatever it tosses at you. And in this helium-charged market, it’s more important than ever that you pay close attention to the factors that can move it and how to prepare for a storm…
When investing in the stock market the investment gods are a tough bunch. Just when you think you’ve nailed a winner, they shake you back to reality with a bump. And trying to nail tops and bottoms is very difficult to do - so much so that even the pros have trouble sometimes.
- Take Elaine Garzarelli, for example, who accurately called the 1987 crash.
- Or Ralph Accampora, whose prediction that the Dow would reach 7,000 was considered laughable at the time.
Despite calling these major events, they soon found themselves back on the wrong side of the fence for years.
Be Prepared When Investing In The Stock Market
Living in south Florida, I view investing in the stock market in the same way as the hurricanes that sweep in every year. Just because the experts are calling for an active storm season doesn’t mean I should close up shop and live in a dark, cave-like home for the next six months.
The key is to prepare in advance, because after that it’s too late. I ensure that I have food, water, batteries and other supplies to get through an emergency. But until there is more substantial evidence that a hurricane is coming, it’s business as usual.
Right now, it’s business as usual investing in the stock market, but the storm clouds are gathering…
Don’t get carried away with the indexes blazing upwards and setting new highs - this market is getting frothy. Here are a few reasons why…
Three Key “Froth Factors” That Could Swing This Market
- Sub-Prime Mortgage Fallout: I suspect the sub-prime mortgage situation will come home to roost at some point. The Bear Stearns sub-prime-backed mortgage funds crisis may just be the tip of the iceberg. The firm just reported that, “… preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High-Grade Structured Credit Strategies Fund as of June 30, 2007.” The news shook the market and some fear that there could be other funds performing just as badly.
- Housing Slump To Weigh On GDP Growth: On a related note, Fed chairman Ben Bernanke says the real estate downturn has slowed overall GDP growth in recent quarters and “… will likely continue to weigh on economic growth over coming quarters,” due to rising delinquencies foreclosures. The National Association of Homebuilders confidence index (which measures current sales and future sales) is now at a 16-year low, and the Fed just revised its 2007 GDP growth forecast down by 0.25% to a range between 2.25% and 2.5%.
- Dollar Woes: The euro is trading at a record high versus the dollar ($1.38). The British pound is trading at a 26-year high at $2.04. The Canadian dollar has almost reached parity with its U.S. counterpart at $0.95. The Aussie dollar is at a 16-year high, and the New Zealand dollar has hit a 20-year high against the greenback. With inflation having a greater impact than in America, interest rates will likely rise further while the Fed sits still, so there could yet be more dollar downside.
Bye-Bye, Bull Market?
I suspect we’re in the late stages of the bull market - the longest one since 1926. The Dow hasn’t seen a correction of 10% or more in over four years and it’s overdue.
A good sign of an end to a bull market is when the laggards participate. As you can see from the chart below, technology stocks, which have trailed the S&P 500, have recently begun to close the gap. That tells me that those people investing in the stock market, desperate not to miss the party, are looking for anything that hasn’t gone up significantly and are throwing their money into lower quality names.
So does that mean you should take profits and move into cash? Not yet. But you should tighten up your stops and keep a close eye on the market’s moves to try and gauge a meaningful shift. People are expecting the pullback to occur at any time - it’s inevitable. And I suspect it won’t take much to move this market the other way. So I’m compiling a list of stocks I’d like to both short and buy at lower prices.
So if the top is near, why not just take profits now? The answer is because investors can move indexes and individual stocks much more than expected, meaning that trends can last longer and go further than you think.
I want to be sure to be able to take advantage of this version of the greater fool theory (which says that when markets and stocks rise to heady heights, you need a “greater fool” to keep the rally going). I don’t have to get out at the very top - I’m just content to let my winners run and start selling once I see solid evidence of a reversal.
As long as you use stops, that you adjust upwards as your stocks climb higher, while investing in the stock market you’ll sleep well at night, knowing your profits are locked in and you’ll still get to participate in additional upside. And when the storm hits, although it won’t be pleasant, you’ll be protected.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
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Today’s Smart Profits Action Center
- The sub-prime mortgage meltdown has led to 30 companies having to declare bankruptcy. In an appearance before the Senate Banking Committee today, Fed chairman Ben Bernanke predicted “significant financial losses” from the fallout, with some estimates putting the figure between $50 billion and $100 billion.
- If fear and greed are the two forces that move the stock market, turn to the CBOE Volatility Index (VIX) for clues into which way it could turn. This proven indicator, ranging from 10 to 50, shows the level of fear and complacency (or greed) among investors. A level under 20 indicates high complacency and that the market could be set to peak. Right now, it’s around 15, having slumped almost 2 points when the Bear Stearns revelations sent the market down on Wednesday.
- Every investor would love to know the secrets that will prepare them for any market climate and allow them to both protect capital and grow wealth. But very few know how to get them. So if you really want to propel yourself ahead of the investment crowd, take a look at this special report that explains the profit techniques America’s richest investors use to make most of their money. All 31 ways to profit are open to you - with one in particular worth as much as 4,001%, and you only have to make one transaction a year. Check it out here.
Related Articles:
- Investing In The Stock Market: You Work Hard For Your Money, Now Make Sure It Works Hard For You
- The Stock Market: A Tale Of Two Bulls… 2000 Vs. 2007
- The VIX and VXO: How You Could Have Predicted The Market’s Recent Meltdown
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