Sep 04, 2009
How to be 100% Sure the Rally is Over
By Andrew Mickey, Q1 Publishing
I had not felt more confident about a market move in months…
The market trend was down. There was no good news coming from anywhere. There weren’t even any “better than expected” bits to look positively on.
There was nothing good - nothing at all. And I was excited about the opportunity to make a killing as the markets continued to slide.
I was so confident I even published this chart for which showed how the last four Fed or government intervention-induced rallies never lasted long. And then went on about how there’s no reason to expect the fifth to be any different:
Needless to say, I was quite proud of myself.
Of course, that was March 11th, the first day of one of the greatest rallies of the past century.
We’ve all watched how Mr. Market works. A pattern is established (i.e. Fed-fueled rallies don’t last). It lets you think you know what’s going on. Then it switches everything up on you. And now, with bearish sentiment soaring, we can put Mr. Market to work for us once again. Here’s how.
A Pattern Makes Perfect
That trade was an absolute terrible one. And it goes a long way to proving the old adage: the easy trade ends up being the toughest.
The important thing was though, although I was confident, put some money on the line betting the market would continue to slide, and recommended President’s List readers do the same, I didn’t get stupid. I recommended and kept a 15% stop-loss on the trades. It was executed the very next day. After that, it didn’t take long to turn bullish on the stocks.
But that’s history though and we want to focus on the here and now and how to take advantage of it. That’s why I’m recommending doing one thing that will allow you to profit from all this and stay well-protected for the downturn…when it does come.
Breaking News: The World is Not Coming to an End
There are so many potential problems out there. Unemployment, commercial real estate, private and public pensions, state budgets, tax hikes, the market is already up 50% in six months...the list goes on and on. Those are mostly considerations months or years away (that’s way too far ahead for Wall Street to look).
We all know they’re coming and they will have a significant impact on the market. But this is the market and it never takes the shortest path to its final destination. That’s why you’ve got to make the moves the market is telling you to take.
Right now, it’s signaling full speed ahead.
That’s why I’m continuing to recommend buying stocks. Of course, don’t do it indiscriminately and I’d still be very hesitant about getting tied up into illiquid assets (i.e. individual corporate bonds), but we could be on the verge of some very big opportunities.
Just take a look at what happened with gold and silver stocks this week. The Fed announced it still has more than $400 billion left to print and hand over to banks, mortgage companies, and other holders of mortgage-backed securities. And gold and silver stocks went soaring. Gold and silver stocks across the board spiked 15% this week and the smaller, undervalued ones did even better.
Then there are retail stocks. Despite the U.S. consumer being tapped out, retail stocks continue to hold up very well. Banks, real estate, and commodities have all run up. Precious metals are running again. And even some beaten down transporters are starting show some interest again.
There have been a lot of opportunities missed by many folks and they could be on the verge of missing out on more. And it’s all because they’re trying to tell the market, “You’re wrong.”
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Don’t Feed the Bears
Now there is a catch to all this (isn’t there always?). That is to use trailing stops.
Long-time Prosperity Dispatch readers are very familiar with trailing stops. Your editor first discovered them back in the late 90’s. And there couldn’t have been a better time to use them, except for now.
If you think about it, the late 90’s tech boom was very similar to now. The markets were roaring. Many investors were excited. They were making 20% or 30% on average per year for almost a decade. The markets were awash with speculative capital. It had to go somewhere. And the Y2K story directed it towards tech stocks.
The tech boom fed on itself. The Y2K investment and the need to bring the world’s tech infrastructure into the Internet age was delivering impressive earnings growth for companies. P/E ratios reached nose-bleed heights as the herd piled in. At the time, pretty much everyone who had been through a speculative bubble new it was going to end.
So there were only a few options:
1. Stay away and
wait for the collapse. That risks missing out a fantastic and wildly profitable
bubble. It’s very tough to watch everyone else around you getting rich.
2. Buy away and then hope you realize it’s the top before anyone else. Hope, of
course, is not an investment strategy.
3. Buy away, use trailing stops, and go along for the ride. Then sell out just
after the top.
Option Number 3 was perfect then and it’s perfect now.
You Will Lose Money
In the end, there’s no perfect strategy for this type of market or any market for that matter.
The market will do what it wants and you can take advantage of it or miss out on it all. Chances are if you’re reading this, you want to take advantage of it.
I know it’s easy to be confident after the market recovered much of its losses earlier in the week. And I know very well where confidence led me to last time. But there’s a big advantage to this type of strategy: you will know when the rally is over.
You can be 100% for sure the rally is over because your portfolio will be mostly cash.
That’s why it’s time to be safe, get positioned to not miss out just in case the economy does grow into what the stock market expects, and still not get hit too hard if it doesn’t.
Next week we’ll be looking at the best opportunities in this market for the short-term and long-term.
Enjoy your holiday weekend.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
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