The Stock Market Event You Need to Guard Against Right Now
We will soon be heading into the final month of 2012. Nothing really surprised me this year, as I thought trading might be up but also cautious. (Read “My Market View: A Risky Start to 2012.”) The S&P 500 is on a five-day winning streak. Is this the beginning of a sustainable rally? I say no, and I firmly believe stocks will find it difficult to advance higher.
Don’t get too excited on the rally and let your guard down. The reality is that the current stock market is prone to downside selling.
Sales on Black Friday by all accounts were fine, but not spectacular. I will provide a complete analysis once the numbers are in for Cyber Monday.
There is also the uncertainty of the pending fiscal cliff. We will see tax increases and budgetary cuts to areas such as government spending that will impact the middle class and, ultimately, its ability and desire to spend.
Then there’s the big financial mess in the eurozone. Greece has yet to receive its next loan, but the country will need it to pay off its initial loan. A mess is an understatement here. You also have the recession in Spain and an unemployment rate over 25%. Moreover, there are another five eurozone countries in a recession, and the eurozone is headed into its own recession.
In all, this is not a time to get too comfortable in the equities market.
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The reality is that, based on what we have seen so far in the third-quarter earnings season, the revenue growth is muted, as America tries to get its consumers to spend. Black Friday and the holiday shopping season will be critical; albeit, I cannot say I’m brimming with confidence.
My most valuable advice for you is to avoid trying to time the market, as this is difficult. A prudent investment strategy is to make sure you have some trading plans in place.
Having a good investment strategy that includes risk management is the key to stock market success, especially at this time, as I outlined earlier.
The most important tenet in trading is preserving your investable capital via the use of risk management. The last thing you want to happen to you is to trade sloppily, losing your tradable capital. You can avoid this by following a simple investment strategy.
When the price of a stock trends higher, you should think about a potential exit strategy. This investment strategy does not mean liquidating profitable trades, but rather protecting your profits. One investment strategy is to take some profits after a surge in the stock. Right now is a good opportunity, since chances are the market will likely retrench.
Another key investment strategy is the use of mental or physical stop-loss limits. The reality is that no one is perfect in trading; I have made mistakes and so have many of you.
For those who are familiar with options, take a look at put options as a hedge against market weakness.
If you are already adhering to risk management within an investment strategy plan, good for you; otherwise, learn them, and it will make you a better and more successful trader.