Trading & Investing Strategies for the Current Environment
This guest post comes from Kevin at 20smoney.com, a blog covering financial topics such as investing, money management and the development of income streams.
Despite the fact that most people tend to think that a market that has already booked a 60%+ rally is a great time to be invested in stocks, I tend to lean the opposite direction. With such a massive run already in place, the risk/reward scenario is not nearly as good as it was when compared to earlier in the rally. So, how should you play the current environment?
The sectors with some of the largest gains this year have been technology and financials. As such, these sectors warrant extreme caution if you are currently long or are getting long any companies within these sectors. If you want to be long the sector, but aren’t sure of specific stocks, consider mutual funds or ETFs such as Financial Select Spider (XLF) and Technology Spider (XLK).
If you’re looking to gain exposure in these sectors, I strongly encourage you to monitor some basic technical signals so that you can identify a clear exit point in case the broad market and/or these sectors reverse and head lower. Watch the 20 and 50 day moving averages. If the stock (or ETF) breaks through these key averages, be ready to exit the position. If you don’t feel comfortable with such a strategy and want to take a more long term focus, I would then wait for a significant pullback, at least 5%, to enter your position. Remember, you’ve already missed a large run in stocks, and you need to be careful entering a position at these levels.
If you have held stocks this year, especially in the sectors named above, you may consider actually selling some of your positions to lock in profits. Taking profits is never a bad idea, and if you don’t want to pull out completely, simply sell half or maybe a third of your position.
If you are looking to enter other long term positions, I would point you towards dividend paying companies that will pay you to hold them. This will help offset any losses in share price if there is a reversal in the markets. Also consider multi-national companies that generate a significant portion of their earnings from abroad (this will help you hedge against weakness in the U.S. economy). In this category, consider Philip Morris International (PM), Wal-Mart (WMT), McDonalds (MCD) and perhaps Microsoft (MSFT).
For me personally, I’m pretty bearish on the economy and the markets. I’m skeptical on the strength and durability of the recovery and the stock market rally. I believe that we have structural issues with our economy that have not been addressed and therefore will prevent real growth. I’m not adding to any positions in the current environment, rather I’m “keeping my powder dry” waiting for much more attractive buying opportunities. I do own gold related instruments such as GLD and GDX because I think gold has the potential to perform well in both an inflationary recovery and a deflationary environment (pretty much the only asset with this ability).
As I mentioned above, if you’re looking to try and make a few bucks on the continued rally in the broad markets, be extra careful and be ready to exit by monitoring some key technical sell indicators. Protecting your money is a better strategy, in my opinion, than chasing returns, especially today. If you’re a long term believer in the recovery and the future of the economy, get long some solid companies, but don’t be afraid to be patient and wait for better entry points.
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November 26th, 2009 at 4:17 am
Wow – this site has become a gold-pimping site.
Look at the last 5 posts :
October 4th – World Bank President: Time To Diversify Out Of The Dollar (into, among others, gold)
October 6th – Gold hits record high!
November 9th – Gold breaks $1,100: Does It Matter?
November 16th – Gold Is A Lousy Investment
November 22nd – Trading & Investing Strategies for the Current Environment (sell stocks, buy gold!)
Do you think that, maybe, you’re finding any and all reasons to back up your continued holding of gold? Sure, it’s done great this year, and over the last 10 years – but like all the terms & conditions say – past performance is not a good indicator of future performance.
A large part of gold’s run-up in price over recent months has to do with the weakening US$. This won’t continue forever, and is probably a strategy to boost US exports in an attempt to help the economy. It’s also aided by weak banks in Europe repatriating euros by selling foreign assets in order to strengthen their balance sheets (causing the euro to strengthen against the US$). Again, this won’t continue (eventually they’ll run out of things to sell).
Also, since the mania has hit the main stream media, the general public are now piling into gold also. As we’ve seen, the public are the last to know about these events, and tend to pile into the trade just as it’s peaking out.
My advice would be to take profits on your gold positions (whether that be selling some or all of the position) or protect it with put options. I’m not going to attempt to predict the price of gold in the future. My short term outlook (6mths – 1yr) is for a stronger US$ & weaker commodity prices.
November 29th, 2009 at 2:39 pm
Let me quote Richard Russell, 85-year-old author of the Dow Theory Letters. He said:
December 1st, 2009 at 7:32 am
Ok, I’ll take your point – I don’t have figures to argue it. Let’s presume that, over the last number of years, gold has returned more than cash (ie. savings accounts paying interest) in inflation-adjusted terms. And Mark Lundeen’s charts show fairly obvious price manipulation of base metals, meaning their price should be higher than it is.
But, the simple fact is that fighting the system that supresses these prices will only lead to bankrupting yourself. They have more resources than you, and when they run out, they can print more! So, when they decide gold prices are too high, they’ll come back down!
Also, while gold stands up as a great hedge against inflation, I’d like to see someone go to their local shop to buy bread and milk with it. The economic system that has been built up depends on the fiat currencies. Without returning to a barter based system, gold has no real value on the street (without exchanging it for a fiat currency). This means there will always be a demand for the currency, whereas the demand for gold is primarily industrial (consumers simply have no use for it, except as an investment).
So, the value of the currencies changes based on supply; the value of gold changes based on demand. Right now, demand is high mainly because of consumer investment and not industrial use which means the price of gold has to fall back to “reasonable” levels again.
I don’t disagree with the argument that fiat currencies are, in essence, value-less pieces of paper, but the demand for them in our economic system gives them value.
December 1st, 2009 at 2:33 pm
the only reason the store will take dollars is because they currently have value – wait until the printing goes out of control like in Zimbabwe. check out this link: http://silverbarsdirect.org/hyperinflation-in-the-us-possibility-or-reality/
December 2nd, 2009 at 12:20 am
The other reason the store takes dollars is because that’s what their suppliers, staff, banks etc. take in payment. To switch all this to gold would require minting gold coins of various denominations, and describing their value in terms of other assets and commodities – something that requires planning and precise execution.
I haven’t been to Zimbabwe, but from what I read, payment for goods was made in US$ (where possible), not in gold.
Again, I don’t disagree that the dollar is being devalued purposely and that hyperinflation is a possibility – what I disagree with is that gold can somehow save you from impending financial doom. It can only do this if the fiat currencies stay in existence. Otherwise, by the time relative value is given to everything to have a defacto currency system in place again, most of us will probably be dead.
So, if you fear impending financial doom, go buy a farm and prepare to grow your own vegetables and rare & slaughter your own meat! Gold will not save you!