Thursday, April 18, 2013

Today's Market
by Dr Invest

Led astray! It happens when we don't depend upon reliable instruments. While in flight school, my instructor placed a hood over my face. It blocked my straight forward vision, but I could still see my instruments. He led me through a series of turns, climbs, and stalls. Each time a new challenge came, my emotions told me things that my instruments were not telling me. I learned that day, that you can't fly by the seat of your pants, nor can you really depend upon your senses and emotion. You must scan your instruments and determine your course by all the reliable data.

There are similarities between piloting a plane and directing your own investments. You need reliable data to pilot through the clouds, the rain, and the lightening. There are adverse winds that pitch and toss your plane creating many contrary emotions and feelings. Likewise, in the market, things are not always clear. Many voices clamor for your attention and they are contradictory in advice. To find your direction in the market, you need clear cut rules. Rules are often practical, but are contrary to your first impulses. For example, when you see other people making 10% to 12% in the stock market in the first four months of the year, your first impulse is to empty your bank account to invest in stocks so you can catch some of these big gains. This kind of assumption may not prove reliable.

   Since the lows of 2009, we have seen a gain of 119% in the DOW JONES. Considering that the bull runs for only around 4 years on average, there is an expectation of increased risk with each day the market climbs higher.

By back testing, you get a false indicator for stocks. All the indicators would point to higher and higher gains because the market has continued climbing, but back testing would not indicate that the market is on the verge of a collapse. Recent bumps in the market are indicating that the bull is getting tired. It is possible that the bull could run even higher, drawing naive investors into a market that is ready for a serious decline. It is also possible that the end of the bull run is now. Regardless of the promises of a bright new future and unending economic growth, the economic data is showing a faltering economy.

At this time, I am placing stop-sells on all investments and waiting for a significant downtrend before returning to stocks. I have suggested that there is a possible HEAD AND SHOULDERS PATTERN. This could bring a 10% decline, with a rise of around 5% before a final and more deep decline in August of September of this year. I am willing to wait, because I know that the opportunity to see gains come when the cycle moves to the bottom.
 
                                                                 MARKET CYCLES
Our example is that if it takes 8 years for a full market cycle and the gain is 100% over the eight year period, the annual rate of return is 12.5% per year. This is a reasonable rate of return, provided you are not caught in the downtrend of the market cycle. We are presently at the peak of the market cycle. Wait to buy at the bottom or near bottom. This would be a decline of 30% to 40%.  


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

No comments:

Post a Comment