Today's Market

by Dr Invest

On May 2nd, because of a seasonal trend for stocks to decline in value and bonds to increase in value, I purchased two BOND ETFs (Exchange Traded Funds); BND and TIP.  If you want to make similar purchases, go back to the BLOG ON MAY 2nd and read to the current date. YOU NEED TO KNOW WHAT YOU ARE DOING BEFORE WILDLY INVESTING.

I have used an IMAGINARY PORTFOLIO of $10,000 to demonstrate the return from investing in BOND ETFs, symbols BND and TIP.

I suspect that after such a "hot market", there will be a reluctance in the market to let go of the idea that the run-up of stocks is over. When exuberance has been "the rule" in the stockmarket, denial will always arise because brokers, advisers, and analysts just can't believe that they missed seeing the possibility that the market could turn down. They have egos too, so to admit to their clients that they were wrong about a recovering economy is hard to do.

Today, the DOW dipped to a two-month low before climbing on the news that Greece was getting billions in emergency funding for the present (€28bln from the IMF). Once again, the can is kicked down the road, reinforcing the idea that Greece need not worry about their austerity program for the moment. The new Greek president is promising to pour money into keeping the government employees, and he was elected on an anti-austerity ticket. In the weeks ahead, the Greek president will be calling the European Commission, International Monetary Fund (IMF) and European Central Bank's (ECB) bluff.

The IMF has promised, €1.2bln payments as long as Greece is implementing the agreed plans to decrease their debt. The DOW responded by rising from its low of the day, showing a .75% loss.

The way I read the market, is that a head and shouders pattern formed, Bernanke's promise to not raise interest rates and some unknown tools he had as a way to stimulate the economy, brought continued speculation and exuberance. With the help of Greece and Spain's negative news, the market stalled, erasing almost half of 2012's gains. If the DOW moves below 12,700, the entire market will likely move lower. I think that tomorrow (Thursday) could see the DOW revitalize or the DOW could go ahead and move below the 12,700 bottom. Tomorrow will be an important day and will determine if the market will regain from its stumble or whether the market will continue its tumble.

Whether this week, or next, I feel that the market will continue its tumble. The SUMMER MONTHS are not kind to STOCKS and I don't see any extraordinary reasons the market would move upward. I do, however, see the market moving further downward and heard that electronic manufacturing was slowing. This is of concern because it suggest that consumer demand is slowing. Though it might take six months or more to feel new recessionary winds on the street, the wind is blowing.

REMAINING CALM

One must believe in their trading method. Being CONSISTENT means being in the right place at the right time to maximize your investment return. Being CAUTIOUS means being careful not to take risk, but to invest the proper percentage of your portfolio in the right place, with a STOP-SELL to protect your position. For instance, from May until November Bonds could be a good investment. ETFs like TIP and BND can produce income for you. YOU DO NOT want to be invested in STOCKS in MAY; stocks decline from May to the middle of October. Being QUICK means you can't play around with losses. I can't emphasis this enough, USE A STOP-SELL. Whether BONDS or STOCKS, protect yourself. Only you can limit investment losses and you do that with a STOP-SELL.

When panic ensues, the market can drop rapidly. One percent, even two percent per day is not out of the ordinary. If you are not paying attention to your investment, over a two-week period the losses can mount up to a significant loss.

I never worry about the daily losses or daily gains. When I buy the stock or ETF, I immediately determine how much I am willing to lose. If 5%, I set my STOP-SELL 5% under the purchase price. The market can move where it wants to, but when it falls below 5%, my stock sells. If it moves down 2% one day, another 1% the next day, and goes up 4% the third day, I could care less. I don't look at prices, I look at percentages.

For example, if your portfolio was $500,000.00 and lost 3% over two days, you would have lost $15,000. Do you really like the idea of loosing $15,000? From the other perspective, a 3% gain over two days would mean gaining $15,000.00. When dealing with larger numbers like this, there is a psychological dimension that is un-nerving. This kind of finanical pressure will drive you insane, wait till the end of the year to determine your real gains and losses. Focus on the percentages. Did I gain 2% this month? Did I can 6% over the past six months? This is easier on the mind and eliminates the pressure at looking at large numbers.

WEAK CHINA DATA

Just before bed, I looked at the Hang Seng Index (China) showing a decline of almost 1% due to data showing a slow down in the Chinese market growth. Be cautious tomorrow. I don't think that we will see an upturn in the DOW, so expect the DOW to trend lower.

(Note: the above information is for entertainment purposes only and not to be used as investment advice.)