Making money in up or down markets
Some strategies work regardless of economic conditions or the direction stocks are moving.
By Thomas Kee, Stock Traders Daily
This is a fabulous environment for traders, but maybe not so good for investors. Luckily, with a slight adjustment, those investors who are struggling can also flourish.
Stock Traders Daily "Stock of the Week" strategy is up about 5% over the past two weeks, but after recent market gains, such returns might not surprise anyone. However, I remain one of the biggest bears on Wall Street. I believe the economy can slip into a depression, and even reach a worst-case scenario I call a "Greater Depression." So how can a bear like me make money when the market increases?
Admittedly, risks are higher now than they have been in a long time, and that affects everyone. But those risks are even more burdensome for people who need the market to rise or the economy to stabilize in order to make money and preserve wealth.
However, investors can adopt proactive strategies that can make money in up and down markets -- no matter what happens to the economy. How is this possible?
Most often, people think that strategies that make money when the market falls do not make money when the market rises, but that is not true. Our definition of a proactive strategy is one that first controls risk and then allows clients to go with the flow when the market moves. If that move is up, so be it, but if it happens to be down, that is fine with us too.
Interestingly, by using this approach, market direction actually becomes moot after a while, and that removes a considerable amount of market-related stress. The market has moved sideways since 2000, for over 12 years, so not being dependent on market direction means everything. That is what the Stock of the Week does: It adjusts to the market when the market moves, while mitigating risk along the way.
Something that happens regularly, I was speaking with a new client the other day who had been with a major brokerage firm in their wealth management program for the past five years; he was not happy. He kept up with the market, so the firm told him he was doing well and should stay the course, but the S&P has returned less than 1% annually for the past five years, and he believed he could do better. I told him he was right, but it meant that he needed to accept the risks that exist in our economy first. Once that happens, I explained, everything gets easier because the weight of the market is lifted.
We must control risk at all times; we need to use strategies that can adapt to market conditions if we want to make money, and, most importantly, we need to stay away from the hype. This is especially true during earnings season.
Recently, earnings reports are where the hype has been. With companies like IBM (IBM), Goldman Sachs (GS), Citigroup (C), and Wynn Resorts (WYNN) all reporting lower revenues, and with earnings misses from 21% of the reporting companies recently, objective minds know much risk lies ahead; I am referencing price-to-earnings, specifically.
From time to time we will see rebounds in bear markets, and declines in bull markets, too, but the purpose of proactive strategies is to make market direction less important than risk control and the ability to adjust to changing conditions.
We had some great examples earlier this month. We first shorted Bed Bath and Beyond (BBBY) and later bought Amgen (AMGN), making sure that each was closed by the end of the week, as is the definition of our Stock of the Week strategy. We end every week in cash, so we can start the next week objectively, without any bias regarding market direction.
This strategy has returned 177% since December 2007. Any idea what the S&P has done in that time? You, too, can achieve these kinds of returns. You just need to start by accepting this economy and stock market for what it is -- a high-risk environment.
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Try as the bears might, they couldn't break U.S. stocks. But investors still face frothy prices and considerable headwinds.
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