(This is an excerpt from the February 3, 2012 blog for Decision Point subscribers.)
As many of you are aware, I've been doing my duty as a citizen of this great country by serving on a jury. It has been interesting, to say the least. The trial is still not over, but I hope to be back full time sometime next week.
After my fellow jurors found out I was a stock market analyst, I began getting questions like, “What is the market going to do?”, “Can you tell me what stock I should buy?”, “What is up with Greece?”, etc.
For those of you who have had the pleasure, you know that jurors have a LOT of time on their hands. It seems you ‘hurry up and wait’ constantly, so I was able answer questions (except the one on Greece, but I have NO idea what the answer will be there).
I began explaining my job as best I could without getting too technical. First and foremost I told them that 1) I cannot predict anything, I have no crystal ball because if I did, I’d be rich and likely not here sitting on this jury; and 2) I am not a registered investment advisor, so don’t take anything I say as investment advice.
I told them that my job is to get as much information about market conditions and trends as I can so I can evaluate whether I want to take action or not. Then I write about it on our website. I explained that you didn’t want to ‘bet’ against the trend or conditions that tell you to expect a certain outcome. You have to determine what is happening in all three time frames, short-term, intermediate-term and long-term and let each time frame help guide you along. All three time frames may say something different, but ultimately, the long-term trend affects the outlook for the intermediate-term and the intermediate-term affects the outlook for the short-term. Additionally, I consider our technical indicators. They give me more insight into what the condition of the market is whether overbought or oversold.
I equated it to black jack (not that investing is the same as gambling, although for the blind investor I suppose it is). You will generally do better than the ‘house’ or the market if you know the best way to play your hand given the condition of the dealer’s hand and the card trend (how many small or high cards have already been played). You won’t always win, but you have a better chance.
So, what is the trend and condition of the market right now? Looking at the chart below, the top part of the chart shows that the S&P 500 has been trending up since the market low in October. The three bottom panes of the chart show us that right now in all three time frames, the market is overbought. The majority of stocks are currently trading above their 20-, 50- and 200-EMAs.
How should we play this hand? I like my odds. It appears I have a good hand because the trend is with me. However, the condition of the market is overbought and could work against me. It is time to probably play conservatively. I don’t think I want to ‘double-down’ on my bet and "invest more" money, I’ll count on the trend and that the dealer will not beat my hand; I should see a return on the bet I already have on the table.
Unfortunately like blackjack, there is some ‘luck’ involved. In the market, I equate luck to those outside influences on the market that I don’t have control over and can't usually predict. Things that can throw the market an unexpected curve ball. An example: news headlines from Europe and Greece. Right now, certain news from Greece and Europe can cause the market to shoot up or tumble lower on just one headline! A stray economic report or utterance by Mr. Bernake and all my prudent investments can greatly suffer or profit without any basis in technical analysis.
Bottom Line: I told my jury friends to keep it simple, don’t get bogged down in the chatter and noise. Get educated on technical analysis (insert plug for our Learning Center on our website), learn as much about current market conditions and trends as possible so your investment decisions are based on analysis not chance. Don’t let the “house” take advantage of you!
