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Trading this Market: The Kiss of Dow10k
While there are still some worrisome indicators about, I will save them for later. Right now though, it is important to think about how we should act, what we should do, and how disastrous mistakes of the past can lead us to profitable maneuvers in the future.
Many of the pundits that I hear of late are encouraging trading in a market that is moving steadily higher. Buying into a scenario such as this takes more discipline than many people have. There are some simple guidelines you can use though that will make any correction in equities (oops! the bear in me is slipping out) less painful.
Once you have made your decision to buy a certain stock, buy half as much as you would like. Your exuberance has probably taken over your research and trimming your enthusiasm for your decision is better done initially. This market is trading at very high levels and in spite of all of the potential, all of the growth, and all of the positive numbers, we have come a long way too fast. Any additional purchase to that position probably should be done in the same manner, buying half as much each time. Even though you believe that buying low, selling high is the way to trade, a common mistake, in this market you are buying high. Your goal at this point is to sell higher and being defensive, which means tempering your exposure just a little will curb the downside possibility that the Street will suddenly understand.
But suppose you believe that a spreading of the risk over entire indices is a more comfortable play. You would be just short of right. The indices, and I am referring to SPDRs and the QQQs, have far too many overvalued and high share priced companies in there ranks. This leaves little in the way of maneuverability. Mid-cap and small cap indices are not only up to fifty two week highs, the belief that they are the engine generating the recovery has been oversold to the investing public. Many of the companies in these indices are waiting for large caps to understand something the seem loathe to admit - the bull is out. Until the big producers of products get behind this thinking, smaller companies, the suppliers of the parts are going to stay within their current trading range.
Using simplicity will be the biggest aid in purchasing anything in this market. A curious method for purchasing stocks right now might be the one proposed by Dennis Gartman some months back in an interview with TradingMarkets.com. He suggested that one of the easiest ways to determine an industry is to determine whether you could drop the product they make on your foot. He later commented that it would be "prosaic America" that would lead the recovery and he is a very bullish as well as a well-read individual. What he is not is a cheerleader.
As I said earlier, there are some technical problems with the markets right now. First off, the amount of volume trading these stocks higher and higher is not the kind of volume that would be considered impressive. Lack of conviction means that money is simply moving around in as many issues as possible, a spreading of risk that isn't necessarily something that should be confused with diversification.
Profits at many companies are up based on lowered guidance that came from inside the companies themselves as reported to analysts. These folks tell Wall Street one thing and then turn around and do something completely different. Underestimating profits is garrulous at best, lulling the listener to sleep while selling their own shares at record levels. Understanding valuations has gone by the wayside as many investors seek only to be on the boat this time when the water rises.
The current Fed stance, which seems to be timid, has allowed portfolio managers to run this economy. If they are not willing to raise interest rates, announcing their intentions in terms of time backs them into a corner and may be a challenge for their credibility. Even this group of experienced bankers cannot foresee that far into the future. Interest rates should be rising as the market improves not waiting until the improvements are finished, investors are speculative and the presidential race is well under way. A year is far too long.
And lastly, productivity is not a good indicator that things have improved. As many of the current workforce will tell you, excluding the temporary force that is shifting in and out of the only jobs available, capacity to produce is strained to human limits. When manufacturers begin to address this problem and rehire workers to meet growing demand for increased inventories, stock prices will begin to fall. Recent manufacturing numbers have surged and from a historical prospective, a reference to two similar surges in Institute for Supply Management figures dating back to 1983 and 1987, this means that shares will suffer as a result. This time the difference will be exaggerated by the lack of pricing power (low inflation), questionable overseas demand (weak dollar), increased trade deficits (closing in on $42 billion), and lack of any new stimulus (the government has done all that it could do and done so to the extreme) will all act in tandem to make the kiss of 10k mostly a peck on the cheek.
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