MARKETS
Why the Stock Market is Like a Deer in the Headlights (Click on title to view original article)
By +Nick Hubble +Daily Reckoning Australia
The daily debate between our office's bulls and bears
continues. Dr Alex Cowie, Greg Canavan, Dan Denning and Kris Sayce all agree
and disagree with each other about where the stock market is headed.
The discussions and email chains are getting longer and
longer. To be honest it's getting old. The flyovers of the Melbourne Grand
Prix's acrobatics planes make for more interesting background noise.
The reason you shouldn't listen to them is that they're all
wrong. And they're all right too. The simple truth is that the stock market as a whole is going
nowhere. It's like a deer in the headlights. A few percent up, a few percent
down. We'll show you just how flat it's really been below.
There are only three ways you can make money in a market
like this:
- You can pick a specific part of the economy and punt big, like Dan Denning is doing on certain shale gas stocks;
- You can actively trade distributions like Slipstream Trader Murray Dawes; or
- You can get paid to wait by investing in dividend paying stocks.
What makes bear markets such a brilliant time to invest is
that you have such an interesting choice of strategies. Every type of
personality and investment mentality is represented in
those three choices.
Strategic thinkers like making targeted bets. Traders keep busy picking off
opportunities on the long and short side. And patient investors who have better
things to do with their time can collect cash.
In a bull market, everyone should make money simply by
having their money in the market. It's a bear market that sets us apart.
But with Wall Street partying over new all time highs for the
Dow Jones index, how can we be in a bear market? Well, adjusted for
inflation, the US stock market is still down more than 10% from its 2000 and
2007 highs.
Source: WSJ
And even though the market may be at an all time high, it's
still within what Murray Dawes calls a 'widening distribution'. If we
understand Murray's theory correctly, chances are the stock market will be
heading back down again soon. Here's what the widening distribution might look
like going forward, if it continues:
If the Widening Distribution in the Dow Continues
Source: Yahoo Finance, Nick's Imagination
As you can see, there's a whole load of ups and downs, but
in the end the market just keeps going sideways. To an investor, that's
frustrating. To a trader like Murray, each one of those moves is an opportunity
to profit.
In the end, despite all the ups and downs, the market is
still going sideways. Until it experiences a proper breakout from this
distribution, buy and hold isn't going to work for a diversified portfolio of
growth stocks. And there are plenty of reasons to believe Wall Street's new
highs aren't a proper breakout.
Chris White of Dewiler compared today's economic indicators
to the last stock market peak in 2007:
- GDP Growth: Then +2.5%; Now +1.6%
- Unemployed: Then 6.7 million; Now 13.2 million
- Food Stamp users: Then 26.9 million; Now 47.69 million
- Fed's Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
- Debt as a Percentage of GDP: Then ~38%; Now 74.2%
- Total US Debt: Then $9.008 trillion; Now $16.43 trillion
- Consumer Confidence: Then 99.5; Now 69.6
- Stock Market Volatility Index: Then 17.5%; Now 14%
- 10 Year Treasury Yield: Then 4.64%; Now 1.89%
- Gold: Then $748; Now $1583
- NYSE Average daily volume: Then 1.3 billion shares; Now 545 million shares
- Dow Jones Industrial Average: Then 14164.5; Now 14,304
In other words, the economy is about half as good as it was
in 2007, but the stock market is at the same level. If the US stock market
halved to reflect what's going on in the real world, that would bring us back
to the bottom of Murray's widening distribution. By the way, Murray would
mention that this is the most likely outcome, but not the only possibility.
Back to what you should do about all this.
To be honest, a combination of all three investment strategies we mentioned
is the ideal portfolio. For most of your portfolio, you should be in dividend
paying companies that give you a return no matter what happens to the wider
stock market.
While those stocks go up and down, you can calmly collect
the cash they pay you to own them. You can also apply some 'punting money' to
making specific bets in stories and investment opportunities you
believe in. Right now, shale gas, gold stocks and biotech are on the lists of
the office's analysts.
But what most people are missing is the ability to be a
little more active. If you can turn the stock markets toos and fros into
profitable moves, imagine how that changes your investing outlook. Here's a
real example.
Back in 2009 and 2010, the Aussie stock market was moving
sideways just like the American one is now, but on a smaller scale. Most investors
were frustrated their stocks were going nowhere. Dividend paying investors sat
pretty and there were plenty of small scale success stories that made punters
money. But overall, things were pretty dismal.
Meanwhile, Murray Dawes identified the widening distribution.
In April 2010 he made a bet that certain Aussie shares would tumble back to the
bottom of the distribution. His subscribers captured the fall represented by
the last arrow on the right below.
ASX 200's Widening Distribution in 2010
Source: Yahoo Finance
Imagine making money while the stock market tumbles.
Rather than imagining it, why not give it a go? If the US
market turns back down to the bottom of its distribution, Aussie stocks will
likely follow. While there's a metaphorical deer in the headlights, why not
have venison for dinner?
The Daily Reckoning Weekend Edition
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