I think it’s very reasonable to say that the stock market is fairly valued at this time. A lot of news, risks and revised expectations are now priced into the market and share prices reflect all the current information. There’s good value in many stocks at this time, but the question is: how long will they remain good values? Another month or perhaps another year? Nobody knows the answer.

Investors want to be buyers of stocks, but they lack the visibility necessary to pull the trigger. This lack of hope is a reflection of the Main Street economy and this sentiment should stay present for a quite a while longer, as the economy still tries to find itself a new equilibrium after the subprime mortgage meltdown. The housing market, jobs, incomes, and spending all require more time to correct themselves. The stock market now reflects the Main Street reality.

The spot price of gold is arguably due for a correction and I think this would be a healthy development for the long-run trend. I still see no reason why gold can’t hit $2,000 an ounce this year, and a little retreat in the spot price would be technically significant.

Agricultural commodities are trading on the weather and they can be considered to be robust price-wise with a solid outlook. The big unknown is the spot price of oil, which is now trading like a barometer on the global economy. The price of oil goes up if the economic news is good. But, just like interest rates, a lower oil price is directly stimulative to spending and the economy. Brent Crude oil is still trading at a significant premium to West Texas Intermediate mainly because of supply issues and the unrest inLibya. Predicting the future price of commodities is a very tough game, but I’d keep silver on your radar screen. It’s as good a bet on global economic recovery as anything.

In just over three weeks, the third quarter will be at an end and equity investors will turn their attention to what corporations are saying about their businesses. My read from second-quarter earnings season is that most companies are anticipating a solid bottom-year performance. There haven’t been any major earnings warnings for the upcoming third quarter, and that’s a positive development.

Right now, there’s no rush for investors to take any new bold action in stocks. I think we’ll continue to have this range-bound trading until earnings news hits the wires. There is good value out there, but I’d mostly wait for the latest information (including fourth-quarter visibility) before committing to some major new positions. The best stocks right now are the ones that pay dividends. It’s the only real return on investment with staying power.

We continue today with investing basics and talk about risk control.

Using stop-loss limits when investing is an outstanding risk management strategy that always pays off in the long term.

When you take on a position in a stock, you should immediately make note of a stop-loss limit from your entry price, say 20%. You don’t have to do this with your broker; you can easily make a note of it yourself.

A 20% stop-loss limit means that if the stock moves 20% lower in price from your original entry price, you cash out with a loss. By taking this loss, you preserve the rest of your capital to stay in the game. The idea is that your winning stock market positions will pay for your losing ones. This is why you always want to own a basket of stocks, not just bet the farm on one stock.

If you have $5,000 to speculate in small-cap stocks, put $1,000 into five companies and see what happens. Use a stop-loss limit on all five positions. Very likely, some will go down in price and some will go up. The goal is to cut your losing positions and ride your winning positions. It’s a simple strategy that works over the long term.

Now, you don’t just want to employ a stop-loss limit when you take on a new position; you want to have an informal stop-loss limit if your stock goes into profit territory. There is nothing worse than going through the time and effort of finding a great trade, taking the risk, making money, then giving up all the gains because you didn’t take any profits.

So, the best thing you can do is maintain a moving stop limit when the stock trades above your entry price. If a stock goes up 30%, consider maintaining a 10% moving stop limit from the stock’s most recent high. This way, you can consider taking some profits if the stock pulls back.

Remember, absolutely anything can happen to a stock. There could be a war, a strike, a stock market crash — anything. So, you have to take steps to protect yourself.

If you want to protect your wealth, then you must pay yourself first. The best way to do that is in cash. The richest people in the world hoard cash, because they know it is the best, least-risky asset you can own. Stock prices go up and down. Real estate prices go up and down. But cash generates a return on your investment that is often backed by the security of countries themselves.

If you want to protect the savings that you have created, you must maintain a portion of your holdings in cash. You can do this by investing in a money market fund.

As long as the returns on your cash investments are greater than the prevailing rate of inflation, you are ahead of the game.

This is how the rich get richer. Sure, they own large amounts of stocks. They own all kinds of real estate. But they also keep a lot of cash around that generates compound interest, year-over-year. This is how the great wealthy families of the world stay wealthy from generation to generation. They hoard cash and pass it down to their children. Cash is always king, no matter what anyone tells you (or tries to sell you).

Now, even when it comes to a small portfolio of speculative stocks, it pays to keep some cash. Why invest all your money at once in the stock market? Do you really think that there are 10 great stocks that just happen to be very attractive right now? It doesn’t make sense hat the best possible investment opportunities just happen to be when you’ve accumulated a little nest egg for yourself.

Take your time; if you have a pool of cash to speculate with, invest it slowly. Keep the rest in a money market fund until you can build a diversified portfolio over time.

Succeeding at stock market speculating takes time, money and practice. The good news is that it doesn’t take an extraordinary effort, only a consistent one. If you can’t afford to lose in the stock market, then you have to take action to separate your speculative money from the rest of your lifestyle.

With as little as $5,000, you could successfully create a portfolio of stocks that you hope will generate solid returns. Remember to spread your money around a number of positions; use stop-loss limits both on entry price and when a stock goes up in value.

You don’t need to be in any rush to take on new positions. Wait and watch for only the best stocks to come across your desk. Only invest in those companies that you are comfortable with. With diligence and persistence, anyone could be successful speculating in the stock market.

— “Ahead of the Street” Column, by Mitchell Clark, B. Comm.

There is a marketplace reality that’s beginning to set in this third-quarter earnings season and the plain truth is that the economy is not that robust as yet. You can see this in the economic data that are being presented and you can see it in the raw numbers from corporations. So, as an investor, you have to be highly selective going forward. I’d be in no rush to buy stocks at this time and I’d
certainly be extremely picky.

This means that, if you want to be considering taking on new positions in this environment, only the best of the best stocks will do. I’ve always contended that a risk-capital investment portfolio of stocks has to be made up of several investment themes, but also several investment strategies within the group. By this, I mean that a basket of speculative stocks should represent a mix of trading (or investing) approaches that can easily adapt to the changing nature of the investing landscape. As an example, you might have a few value plays in your portfolio with a one-year time horizon for investment. But, you might also have several momentum trades with close stop limits. I’ve found that, over time, a mix of investment strategies is necessary if you want to outperform consistently. The all or nothing portfolio strategy only works if you get lucky.

Now that the Main Street economic reality is hitting Wall Street, the choppy trading environment for stocks calls for different trading tactics than you’ve used previously. Just a few months ago, all you had to do was own the index and you were making good money. Now, trading action has stalled, so you only want to be considering those stocks that are really outperforming — both in terms of price action on the stock market and operationally within the underlying business.

One of the best ways to come up with lists of great stocks to investigate is to peruse the daily earnings reports to see which companies are outperforming. It may not be that much of a big deal if a company beats consensus Wall Street estimates, but, as an investor, you can use this data as a benchmark for your searches. Most of the finance web sites on the Internet offer all kinds of this data for free and they make it easy to search those companies that beat the Street. Earnings season is always the best time to be researching new stock-picks, so why not take all the companies that beat consensus estimates by 40% and look into them further? Trust me; the list won’t be that long.

It takes time and effort to find the best companies and the best stocks in the entire equity landscape. At any given time, there is only a handful of really attractive stocks to consider. This is especially the case when the broader market stalls. It is incredibly valuable to do your own stockmarket research if you want to be a successful speculator over time. In fact, you have to do your own research, because this is the only way to develop and hone your own market view and your own stock trading skills. You can’t just purchase someone else’s stock-picks and be continuously successful in the equity speculation business. Being good at speculating in stocks is just like playing a great round of golf. No book or service can help you become consistently good at the game — you have to go out there and practice it yourself.