Between August 6 and August 26 last year, the market dropped 713 points. It seemed precipitous at the time. The factors affecting the market drop were the upcoming U.S. elections focusing on the enormous U.S. deficit and debt, the talk of Eurozone sovereign debt default (Greece, Portugal, and Ireland), and the incessant talk of the U.S. entering a double-dip recession. As well, the market had concerns about high U.S. unemployment and the moribund U.S. real estate market, and there were still lingering concerns about the financial health of the U.S. and European banks. Does any of this sound familiar?
Now, add in the current concerns about the U.S. deficit and debt, the recent S&P downgrade of the U.S. credit status, and a dose of concern about Italy and Spain defaulting on their debt and then you will have a handle on the dramatic volatility and the downhill slide of the global markets this August. It seems nothing changes as much as it remains the same. The only real difference between then and now is the intensity of the fear and the size of the drop. Make no mistake, the issues this year are huge, and each has the potential to derail the battered global economy in the near future, yet, underneath the negative stream, a positive current flows …
Last January, U.S unemployment was dropping, U.S. GDP was improving, China was on economic fire, and Germany and Japan were turning their economies around strongly. Then, along came unprecedented tornadoes, floods, earthquakes, tsunamis, the revolts in the Middle East, surging commodity prices, rapidly rising oil prices, and the serious threat of global inflation. All of that turned the global economic recovery upside down. When August began, the price of WTI oil hovered around $100 and Brent stood near $115. U.S. unemployment had risen to 9.1%, global manufacturing had declined for three straight months, and China had spiked interest rates several times to curb internal inflationary pressure. Japan was still trying to recover from the March disaster, and the potential defaults of Portugal, Ireland, Italy, Greece, and Spain (PIIGS) presented serious threats to the stability and integrity of the Eurozone itself. Talk of a global economic retreat into recession reignited with a fury, and the doomsayers had front-page space and plenty of airtime to peddle their negativity. Consumer and business confidence had plummeted amidst the din of economic dissolution and the political battle that brought the U.S. to the very doorstep of debt default. Had enough? Good, because here comes the good news …
All the while the bad news kept coming, somehow corporate profits kept rising. With each quarterly report, more good news flowed about corporate profits. In fact, the latest corporate earnings season finished on a positive note with some 75-plus percent of businesses meeting or beating Wall St. expectations. Of course, as profits rise and the market drops, valuations become cheaper and PE ratios drop, making for a buyer’s market. Those in the know understood this.
As the market swooned, corporations and corporate employees smelled opportunity. In one three-day stretch this month, insider buying exceeded insider selling by almost 14 to 1. In the same period, corporate stock buybacks took off, making the combined stock purchases of insiders and corporations greater than what occurred in March 2009, the bottom of the 2008-2009 bear run and the beginning of the bull rally that ran out when the all “stuff” began hitting the fan last winter and in early spring.
As well, it looks as if China might successfully tame its inflationary pressures, and Germany, France, and the European Central Bank (ECB) might well step up with a TARP-like bailout of the PIIGS countries. Factually, the ECB has already begun purchasing Italian and Spanish bonds, driving both of those 10-year rates under 5%. Here in the U.S., Congress has set up the super committee of 12 that gives hope that a viable, long term, debt-reduction plan will be ready for a vote by December 23rd. Of course, the doomsayers are already predicting failure, but these thorny political issues are slow, dirty, and cumbersome. If history is a guide, however, in the end, the pressure to deliver should be enough to get the job done. We will see …
More good economic news is that Japan is recovering faster than anyone imagined it could after such a horrible natural disaster. Toyota and Nissan have upped their car numbers, and the prognosis is the industrial sector decimated in March could be fully operational by the end of September. Along with that, oil prices for WTI are now in the $80-$85 range and Brent is running $105-$110. Commodity prices have eroded somewhat, so that, in combination with lower oil prices, means lower energy and food prices, which will bring some relief to the global consumer, and that means more discretionary income to spend. In fact, excluding autos (think Japan), retail sales in June beat forecasts. On the flip side, U.S. consumer sentiment worsened in early August, falling to its lowest level since 1980. So there you have it – the underpinning for the market volatility, and even though some positive flows underneath the negative, plenty can still go wrong that could send the market into a deep, deep dive.
The question becomes, “What does an investor/trader do in this wild market?” Lou Mendelsohn, the founder of Market Technologies (www.MarketTechnologies.com), trading software pioneer, and the creator of VantagePoint Intermarket Analysis Software reminds, “The important thing in these volatile times is to remember the primary rule of investing and trading: Always preserve and protect capital.”
This does not mean putting your money under a mattress, necessarily, but it does mean you need to act defensively until the roiling market waters calm a bit. This is where a software program such as VantagePoint can help. Because VantagePoint offers such a wide variety of leading indicators and trading tools, traders and investors can both find “safe” opportunities in a tough market to preserve and protect capital as well. For example, the extreme market volatility makes finding entry and exit points difficult for a trader. VantagePoint offers a number of entry and exit tools to help with this. One such tool is the Predictive Differences.
This tool, among others, helps traders find accurate and tight entry and exit points that both maximize potential profit and minimize potential loss. The one caveat in this is that the whipsaw action of the market makes the trade more vulnerable, if you have a tight entry and exit. The market can take you out or put you in profit quickly. Since protecting capital is the issue, tight entry and exit points mean less profit, but they also ensure minimal loss.
For investors, solid defensive plays are good in these markets. Finding, “safe” equities that pay decent dividends is a solid way to preserve and protect capital. If you believe the market is correcting, then you get paid to wait. The danger is putting your eggs in a single basket or two. Better to invest in an ETF that is one basket of many “value” stocks, such as the iShares Russell 1000 Value Index. True you can invest in this anywhere, but with VantagePoint, you have the ability to find the best entry points much more accurately.
Along with the predictive indicators, you can set the Intelliscan filters (70-plus filters) to tell you when the ETF is trending your way, how long it has been trending that way, the strength of the trend, the volume associated with the trend, and whether the ETF is overbought or oversold, just to name a few.
The important thing to understand is that today’s market environment is tough, but if some of the big issues get resolved satisfactorily, then confidence will come back, which will then allow the positive undercurrent to become stronger. “In my decades of experience, I have seen markets drop dramatically. The one thing that has always been true when this happens is that they come back up. The issue is not if, it is always when. One never really knows for sure, but I suspect the same is true today,” says Mendelsohn, the man who invented strategy back-testing for personal computers, the tool that looks to the past to predict the future.
In the meantime, if you want in, then you must do it carefully, utilizing the best tools at your disposal. As well, keep Mendelsohn’s advice in your head – First and foremost, preserve and protect your capital in these dangerous times.
