It’s almost as though May and June didn’t happen.
You could have gone on holiday around mid-June and come back today assuming not much had happened – even though the market has fallen and risen 10% in that time.
Yesterday the S&P/ASX 200 index finished the day at 5,157 points.
That’s just 92 points below the high point the index hit on 15 May.
So, what can you expect to happen next?
Let’s see…
As confident as we are about the market going higher, we’re also aware that a ‘bolt from the blue’ could send the market tumbling.
That’s especially so when the market is at a key level. We’ll show you what we mean in a moment.
So, which is it? Will it be a rising market or a falling market? You want clear-cut and direct advice. You don’t want to hear that the market could go one of two ways.
That’s the kind of junk you’d expect from the mainstream media. So, here’s our view straight down the line…
Our simple message is that it’s OK to have Plan A if things go to plan and a Plan B if things don’t go according to plan.
That doesn’t mean you’re sitting on the fence.
We remember the boss at our old broking firm. If anyone wavered on forming an opinion on a stock, he would say in a monotone, ‘Take a view.‘ He would keep saying it until the analyst or broker said a stock was either a buy or a sell.
It was a useful lesson that we try to stick to today.
However, taking a view one way or the other doesn’t mean being inflexible.
Stocks may be a buy one day with a certain set of risks, and yet they could be a buy with another set of risks a few days later. The same goes on the sell side.
Let’s show you the last few weeks of price action on the S&P/ASX 200 as an example. Look at the chart:
Back in June it seemed to most people that the world was ending as bond yields soared. But we figured it was a storm in a teacup. We said investors should use the ‘crash’ as an opportunity to buy shares.
We took a view and clearly gave you the advice – buy stocks (we recommended ‘scaling in’ if you weren’t 100% sure).
Even so, we got plenty of emails telling us it was a foolish view and that we had ‘sold out’ to the mainstream (even though the mainstream was saying sell and ran stories each day about the billions wiped off the market).
Now, that didn’t mean our strategy was risk free. But we figured if you also followed our advice by only having a maximum of 40% of your wealth in the stock market, then you had some protection if the market kept falling.
It turns out our advice was spot on. Stocks rallied and are now back near the top of the range.
So, what do we say now? We need to ‘take a view’ on where the market is now.
Well, we can’t ignore the fact that each time stocks have moved into this zone they’ve met resistance. It’s happened twice already this year – in March and again in May.
And if you look at a five-year chart you can see stocks have failed around this level several times in 2009, 2010 and 2011.
There’s nothing to say stocks won’t fail this time too. But we’re still backing stocks to go higher. We’re still banking on the main Aussie index hitting 7,000 points two years from now.
For that reason we suggest that you selectively buy dividend-paying stocks and beaten-down growth stocks. If we’re right and the market finally bursts through this point of resistance, it could result in rapid gains.
One reason for that is many traders will have placed stop orders to buy-back stock on their short positions around this resistance level. In other words, once the market gets near that level they’ll rush to cover their short positions in order to prevent further potential losses. Short sellers will be in some pain at the moment, following the market’s quick rise.
Of course, just as it was risky to buy stocks during the June sell-off, it’s risky to buy stocks now. It’s just a different set of risks.
Instead of buying into a market when investors are fearful of the market falling further, you’re buying into a market where investors are fearful of giving away profits if the market falls.
Finally, don’t underestimate the power of investor psychology and stock price momentum. It may sound crazy but sometimes just the lack of bad news can be enough to keep a rally going – ‘no news is good news’.
That won’t be enough to take the Aussie index to 7,000 points, but it could be enough to carry stocks through this key resistance level.
We know that view will anger plenty of folks. They’ll accuse us of ‘lightweight’ analysis. But we simply say, do they want heavy analysis that doesn’t make them a penny, or do they want actionable analysis that has helped investors keep their heads and buy stocks when most others were panicking to sell?
The fact is to a large degree investing can be as simple or as complicated as you make it. Where possible we try to keep things simple.
In short, we take a view on the markets and tell it to you straight. Plan A is to buy stocks. Plan B is to make sure you don’t have too big an exposure to what is still a risky market.
That’s not hedging bets or sitting on the fence. It’s giving sound advice that should have served you well over the past two years of volatile markets.
Cheers,
Kris+
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