Insights & Advice


Markets Claw their way Higher

We’ll give the bulls an ‘A” for effort. Every day this week they pushed the S&P 500 higher, making two new yearly highs, before sellers appeared to drive the averages back down.
Friday was no different. The S& P 500 hit 1,119 intraday, another yearly high, before sellers took profits. The Dow and NASDAQ experienced the same kind of action. A lot of the volatility can be blamed on the dollar, which had ceased its downward descent and instead bounced up and down while taking the markets with it.

Those investors who believe the stock market is taking its cue from the economy have it wrong. As I’ve written before, the markets have discounted most of the economic news you are reading today. The unemployment numbers released on Friday are a great example. Clearly, they were better then expected and although the averages initially rallied on that news at the opening, traders used the gains as another opportunity to sell. It was, in my opinion, a rational thing to do.

For the last few weeks, I have been suggesting to readers that it might be time to start taking some profits. I still believe that. The decline in gold on Friday is a great example of what can occur when you sit on profits too long. Last week I advised readers to sell some of the metal since gold had reached the lower end of my target range of $1,200-1,300/ounce. This week gold hit an all-time high of $1,213 while silver climbed to almost $19.50/ounce. My target there is $20/ounce.

Investors who did not heed my advice woke up Friday to discover gold dropping rapidly and last I looked was down $62 to $1,156. Silver dropped 69 cents to $18.43. What changed overnight? My answer: profit-taking, nothing more, nothing less. I hasten to add that after this much-needed period of consolidation, gold and silver will continue to move higher and at some point achieve the higher end of my predicted range. Wouldn’t it be nice to have taken some profits, sit back and watch the decline and maybe buy back $100 lower?

The same thing can happen at any time in the stock market for the same reason—profit-taking. Like gold, stocks have had a huge move since March and are ripe for a correction. After a pullback, I believe the markets will resume their upward climb. You can either resign yourself to standing fast, accepting an erosion of the profits you’ve made, while waiting for the averages to come back, or you can take some money off the table now. Remember, you can’t profit from market pullbacks unless you have the cash to invest.
And what if I’m wrong?

So what! You can still use the money to re-allocate your portfolio. Buy sectors or stocks that have underperformed up to now. Small cap stocks, for example, have had a great year; but maybe its time to switch into large caps or use some of your gold profits to buy the agriculture sector or consider consumer durables.

Now, I know some of you will find my advice contrary to everything your broker or money manger tells you. The ‘Buy and Hold” mantra that wiped out 30-50% of your savings last year is still very much alive among those in the financial advisory community. Most likely, many of them finally put you into conservative bond funds (after begging them to do so all last year) at the bottom of the market. As a result, you’ve made some money back but you haven’t really participated as you should in this 50%- plus move to the upside.

Stop listening to them. Listen to yourself instead; or better yet, your wife. That’s right; I believe women have an intuitive sense about profit-taking while men find it extremely difficult to sell. Use a Buy and Sell strategy, especially when you have made the kind of windfall profits the stock and commodity markets have given you this year.

Posted in At the Market, The Retired Advisor