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Tuesday, April 26, 2005
Market Recap
The market continued its doldrums today with another sell off and closed near its lows of the day. Just when many think the rally will hold, it fails and gives it all back. Yesterdays gains were wiped out today with the DOW dropping 91 points. The NASDAQ lost 23 points and the S&P lost 10 points. All three indices closed at their lows of the day and at the bottom of the bear flag patterns, as shown here many times. I mentioned last night that yesterdays rally was on low volume and not to expect it to hold. Today, the S&P ran into the 1163 resistance level that I spoke about on Sunday night. When it could not break above it, it promptly reversed and closed below its 200 SMA at the lows of the day. With all the indices below their 200 SMA, plus a number of other factors that are negative, I see no reason to be long this market.
The Bearish Argument
Here are some reasons that I am bearish at the point in time. Along with the indices still below their 200 SMA, they all have negative bearish flag patterns. We have seen rallies on weak volume which tells me that there is no institutional support for the market. The TRAN and RUT are below their 200 SMA and all these indexes have bearish flags, thus signaling another drop is on the horizon. Speaking of bear flags, tonight's theme on the charts is ‘Bear Flag”. You will notice that many stocks have bear flags similar to the ones we see on the indices. This cannot be good for the overall market moving forward. With charts setting up in this manner, I do not see how anyone would want to be long this market. Cash is King and if you must trade, trade the short side of the market.
Oh No, More “Expert” Advice
If ever there was some bad advice coming from a so called Wall Street expert, this article is the pinnacle of bad advice.
http://money.cnn.com/2005/04/22/pf/saving/willis_t...
Any tips to surviving the wild swings in the stock market lately are something that every investor would be interested in. Let's take an in-depth look at this "expert" advice and see just how good it is.
1) “Ride the wave” - In other words, if you are on a sinking ship, grab a deck chair and relax. This might be the worst advice in the entire column. What they are suggesting is that you become lackadaisical in your investing. Get into a stock and then do not worry if it goes up or down. Just ride the wave, and eventually you will come out ahead. Look at some of the market leaders from just a year or two ago and compare the price of the stock back then to the price today. The column writer has just told us what has been in the theaters already... Titanic. Ride that ship right down to the bottom. That is just what happened to investors in EBAY or TASR last year. These are just examples but there are many other stocks that have sunk to the murky depths of the stock market sea and taken the portfolio values of many “buy and hold” investors down with them.
2) “Do not listen to your cousin” - I would agree 100% with this line of thinking, if we were referring to taking the advice of the writer of this article. True, you should not be buying every stock that you have overheard someone mention. But, I do not agree with the writer when he says "Unless you are a certified financial planner with 20 years experience, there is no sense in buying single company stocks." This is absurd in my opinion. There would not be many traders if everyone followed this advice. Once again, the lackadaisical approach to investing is shining through in this writer's investing style.
3) “Keep evaluating” - Some decent advice here! Or, at least they are eluding to some decent advice. Unfortunately, they talk about mutual funds as a way to diversify your risks because they are already diversified. Mutual funds are for the "lackadaisical" investor who has not got, or does not want, to put in the time to trade individual stocks. Mutual funds can be a good inclusion in a long term investing strategy but you still need to be aware of the trends in your funds chart, just as you are aware of the trends in your stocks chart. You do not want to simply buy funds and think that all of the risk has been taken out of investing. Watch the chart of your fund and if it breaks down below a support level or trend line, its time to sell it.
4) “Watch the expenses” - Decent advice, in general. Unfortunately, the writer is again limiting their outlook to mutual funds alone. We need to pay attention to how much our commissions are. If you are an active trader, those fees can add up. So make sure you have a solid investing platform, coupled with a low commission rate on those trades.
5) “Home is where the heart is” - I am not exactly sure where this belongs in this article. Perhaps the writer needed one more point and was too lackadaisical to come up with something more solid. The basic gist of this point is to pay off your mortgage if you own a home. I agree that home ownership is a wealth building investment however, paying off your mortgage rather than putting the extra cash to work in the stock market is not a wise choice, considering how low mortgage rates are these days. Most people are paying 6% or less on their mortgage. I guarantee that I can make more than 6% in the stock market and get the tax break on the mortgage interest to boot. Your home is a great long term investment, so why not take advantage of the low rates and borrow that cheap money to put to work, making more than the 6% you are paying out?
The Bottom Line
Investing for the long term is a solid base to build a strategy on but taking a laid back approach to investing is not the way to do it! This article is the epitome of the advice that 99% of investors follow. Put your money to work in mutual funds and do not bother looking at them for years to come. If you put enough money into funds, the power of compounding will pay off for you in 20 or 30 years, there is no disputing that. However, this is not the way to get wealthy using the stock market as a wealth builder, especially if you wish to retire early. For example, if you invested in an S&P index fund 6 years ago, you would be even right now. That is 6 years of zero capital appreciation. I have made a lot of money in that same time period by actively managing my trades, as opposed to just indexing and letting it take its course.
The key to investing is knowledge. If you can learn how to trade in and out of stocks and mutual funds as trends reverse, you will come out far better than the “buy and hold” investor. Not only will you outperform the market, but you will outperform the market by leaps and bounds. Do not get lackadaisical, that is the worst way to let your money work for you.
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