Will the market go higher?
Or will it go lower?
What’s your bet?
Go on. If you had to bet a meaningful amount of money on the market – an amount that would cause you a mild amount of distress if you got the bet wrong – which way would you go?
Whatever your answer, you probably don’t realise it, but you already make this bet each and every day.
And if you bet wrong on a consistent basis, it could result in more than just mild distress…
It was a great close for the Australian market on Friday.
During a week that started off with fears of a new Middle East war, the market closed down just 30 points compared to the previous Friday.
That’s just over a 0.5% fall.
It’s another example of the market looking for an excuse to go up, rather than an excuse to fall.
You can see that on the following chart…
We’ve shown you a version of this chart before. You can see the range between the highs and the lows narrowing over time:
When the market behaves this way it’s like a coiled spring. It’s compressing as much as possible, just waiting for a reason to uncoil.
And when it does, the market does what you’d expect from a coiled spring; it unravels in a hurry. If the market does as we expect and it truly is looking for an excuse to go higher then our bet is it will be a quick move when the spring uncoils.
That’s why we’re so keen to ensure you invest in stocks. Because when this market moves it will move fast.
However, by now you should also know that your editor isn’t a cheerleader for the market. We know there are some big risks, and if you don’t know that you’re setting yourself up for a bunch of trouble…
The newest member of the Money Morning team, Vern Gowdie, says it’s an extremely risky time to buy stocks. Why? He rightly points out that the huge expansion of credit is a major reason for the 40-year rally in stocks.
But now the credit boom is over (or nearing its end) the next move for the market should be down as we enter what Vern calls ‘the Great Contraction’.
Vern warns that unprepared investors will suffer greatly. He’s especially worried about those who have bought dividend stocks to earn an extra couple of percent in income.
We take a slightly different view to Vern. We say that investors can’t afford not to invest in dividend stocks due to low interest rates. But it is a risk.
In some cases the upside for dividend stocks may only be the extra 2-3% you can earn from dividends compared to cash. On the flipside, the downside could be 20%, 30% or 50% if the dividend rally ends and stocks fall.
This is what we alluded to at the top of this letter.
But let’s get to our point. If we asked you today to bet $50,000 on the market’s direction, you’d probably tell us to take a hike. You’d probably even say you don’t gamble apart from the Melbourne Cup.
But if you’ve got a $50,000 share portfolio, gambling is exactly what you’re doing.
If you’ve got a $10,000 share portfolio, then you’re making a $10,000 bet on the stock market. If you’ve got a $1 million share portfolio, then you’re making a $1 million bet on the stock market.
Sure, it’s not like betting on the nags or the dogs where you’ll lose your entire stake if you lose the bet. But make no mistake, it’s still a bet.
In Money Morning throughout this week we’ll focus on the risks of betting on a market that’s trading around a key level.
We’ll look at ways to minimise your risks from an adverse market move.
The most obvious strategy is to not own stocks at all. Although that strategy itself involves risks. That is, the opportunity cost of not owning stocks.
If the stock market takes off and you’re still holding cash there’s a chance you won’t have grown your wealth enough to allow you to live a comfortable retirement.
Of course, on the other hand if you’ve got too much in stocks and the market falls, then likewise you could find yourself with much less in retirement than you need.
That’s the view Vern Gowdie takes right now. He says the market is just in a short-term bull rally that’s part of a secular bear market…a market that could see stocks fall 90% in the coming years.
There’s no doubt it’s a confronting and bold call. But it’s one that every investor should take note of. As we say, our view is that stocks will soon take off (perhaps this weekend’s election will be the event to uncoil the spring), but it’s also important to make sure you know all the potential risks.
After all, when you’re making a big bet on the stock market every day, like betting on the horses, you’ve got to know the market’s form. It could be the difference between making or saving hundreds, if not thousands, of dollars every day.
Cheers,
Kris+
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