The DOW closed below 8,000 for the third straight day on Friday. I believe that the longer the DOW remains below 8,000, the higher the probability of ...
The DOW closed below 8,000 for the third straight day on Friday. I believe that the longer the DOW remains below 8,000,
the higher the probability of a test of the November low. Should the economic stimulus plan fail to meet expectations, it could be enough to drive the DOW to the low. With U.S. and global markets continuing to be vulnerable to selling, it is time to examine what to do.
Think about it. Japan is in another deep recession and is struggling to stay afloat. The country has been largely in contraction over the last several decades, and it continues to struggle. China reported that its fourth-quarter GDP fell to 6.8%, driven by the slowing world economies, according to the National Bureau of Statistics (NBS). The declining GDP is troublesome, and it will impact world growth. China’s GDP was 9.0% in the third quarter and 10.6% in the first quarter. For 2008, GDP growth was 9.0%, which is excellent versus the contraction in the U.S., but it was the lowest growth rate since 2001 and it was down from 13% growth in 2007. The International Monetary Fund cut China's GDP growth to 6.7% for 2009.
The losses in 2008 were significant, and they have impacted investors across the board. And, six weeks into 2009, things continue to be bearish, with negative sentiment driving trading.
In the past, we have heard bearish comments from key figures. French Prime Minister Francois Fillon said the world was standing on the "edge of the abyss" due to the potential negative impact of a global financial crisis. Economies in Europe are struggling despite global efforts to halt a financial meltdown.
Billionaire investor Warren Buffett is also concerned about the condition of the country. He said that the U.S. has been hit with an "economic Pearl Harbor."
Jack Welch, the former head of General Electric Co. (NYSE/GE) believed "one hell of a deep downturn" was in the works.
So, as an investor, what are your options at this time?
Many of you trade or invest in small-cap stocks, but with the threat of a global recession, small-cap stocks have been plummeting in value. Smaller companies will find it much more difficult to access financing in a slowdown. Equity financing may be impossible to attain during a bear market. Debt financing is possible, but the financing charges would likely be extremely high and take a bit out of cash flow.
The most important thing is prudence. Do not chase stocks higher on a rally, as it will be likely not sustainable in the current market environment, as we have seen. Buy-and-hold investing will not work at this time, as it is a traders' market. But if you want to trade this market by buying on dips and selling on rebounds, you will need to make sure you have stops in place just in case the support levels fail. This type of trading a sideways trading market could reap some nice gains. Pick only a few stocks. Become familiar with their trading pattern, and off you go.
I believe you should stay on the sidelines and wait for things to settle down. The intraday volatility is intense and is not advised for the majority of investors. Keep cash in high-interest paying accounts for easy access. Do not place funds in high-yielding financial stocks since these stocks remain vulnerable to downside risk.
Another alternative is the use of put options for a single stock or a basket of stocks where buying put options to match each stock would be both economically infeasible and improbable due to the limited selection of put options. If you own a basket of stocks, look for a stock index option that has a high statistical correlation with your particular group of stocks.
The bottom line consists of capital preservation and looking for trading opportunities. Make sure you have money around when the market rebounds, as it could generate some good gains.
Profit Confidential
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