Wednesday, October 5, 2011

Is it safe to get into the stock market yet?

Stock market investing 101?

When will the whistle sound the all-clear telling investors that it is safe to get back into the treacherous waters of stock market investing?

The global economy as well as the global political picture are in as great a state of flux as I have seen since I first started out as a bond analyst on Wall Street some 30 years ago.

Since that time I have witnessed many debacles including the S&L crisis, a large bank failure (Continental National Bank of Illinois), major fraud and accounting scandals (Enron, Worldcom), the tech bubble bursting, Ponzi schemes and the financial crisis of 2008 that has extended to the present and that may be spreading into sovereign debt default and the potential disillusion of the EU.

That's a lot of crises!

We are currently in the age of hyperbole where every crisis or great play in a game becomes the worst or greatest of all time.

This is certainly the case with the press surrounding the financial markets now.

But to someone investing their money in the hope not only of watching it grow, but of avoiding watching it get cut in half, hyperbole and press doesn't matter nearly as much as preservation of capital.

Invest to play again another day!

If anyone truly knew the answer of when it was safe to go "all in" to the stock market they would, as they say, be living on an island somewhere.

There are too many unknowns during good and stable times to be able to make that call, and during these times of global economic, political and societal turbulence it is just that much harder to predict.

So what is an investor to do in a time where real interest rates (interest rate - inflation) can be negative, the equity markets are mired in negative sentiment, trapped in a downward trend and are extremely news sensitive?

Defense, defense, defense

As I heard Jim Kramer on CNBC tell it an investor needs to play defense. One method is to buy the stock of high dividend (5%) yielding company's where an investor can be as certain as possible that the dividend is safe.

While there are never any guarantees, this dividend yield will help to put some type of floor under just how low that stock can go.

But how can anyone really tell when a market is nearing a bottom?

The answer is that there really is no answer, but from my 15+ years as a proprietary equity trader and trainer of other traders there can be one simple clue although it is certainly not foolproof.

It's not foolproof because in a market like this there are so many potential shoes that could drop at any time of the day or night, but here it is.

It's a very simple concept and one that is somewhat counter intuitive because it means going against the grain and against the human psychology of following the crowd.

It is also something that should be done before you receive certain confirmation that you are correct, something which also goes against most peoples mindset.

When a market like this bottoms and snaps back it will be a violent and quick move as traders and investors all try and get back into the building at the same time.

Very simply, when bad news begins to become more and more irrelevant to the market and is absorbed with less and less downside reaction and price movement, you will know that it could be getting close.

The caveat is that unlike a single stock earnings report, we are currently dealing with huge macro events with the potential for a new shoe to drop around every corner.

The bottom line is that caution is the mantra for now with the yellow flag the symbol.

As an indicator watch the financial stocks for some clues as they are at the center of the economic universe (i.e. ETF symbol XLF).

And finally, bet with your head and not over it as the stock market, particularly during the greatest financial crisis of all time (hyperbole?), can be an unforgiving place!

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1 comment :

  1. Playing the stock market means you have to pay attention to things you can’t control. I disagree with a complete long term buy and hold because I don’t feel like losing 20-30% value each time there is a big bust because how long it takes just to come back to prior levels.

    I buy and hold during good times and switch to bonds (normally) during bad times. So I’m really just following the business cycle and not really timing the market.

    Investing in real estate and land where i live is another great place to put your cash advance loans when you have enough. For example if you have a storage building and rent it out on a 5 year contract, you have a solid income stream for the next 5 years and can get a better return on your investment by doing it yourself. Heads up, things like this can take up more of your time though.