What's Next For The Market?

Technically, the market is at an inflection point. According to the Dow Theorists, if the Dow breaks 11,823.7 if would signal a correction and even put the market into another bear market. While technical analysis can be correct sometimes, it can also be incorrect sometimes. If it always worked, you could buy the right algorithm, kick back and relax. But, on the other hand, many traders follow the Dow Theory and that alone could move the market for a while.

We do know that the markets are levitated due to government spending and require additional government spending to keep going. So far, talking about cutting government spending is just talk; nothing significant has actually happened. I suspect cuts, if any, will be minor (less than the $1.5 trillion needed to get us a balanced budget.) Therefore, for the moment, I assume overspending and quantitative easing will continue, maybe for years.

also, Fed Chairman Bernanke has the stock market targeted as one of him main objectives. He wants the market to go higher so “animal spirits or greed” will kick in and take over so “real” consumer spending can take place. Therefore, If the market should sell off to 10,000 +/- (about a 15% drop), I think the government will intervene with both stimulus and more quantitative easing (printing money.) After all, it’s only 19 months to the next election…and voter pain will not be tolerated.

If Bernanke continues to punish savers, should you change your strategy?

If Fed Chairman Bernanke continues to punish savers by holding (“for an extended period”) interest rates at extremely low levels, should you increase your risk and buy higher yielding bonds and preferred stocks? His actions seem to indicate that is what he wants you to do.

Before doing this simply by increasing risk (lower rated bonds) or extending maturities (going from short-term to long-term bonds), you should consider approaching the income portion of your portfolio with a strategy hedge funds use to reduce some of this risk. Think about both principal risk (return of principal) and market risk (volatility of your principal.)

You know that selecting strong companies or government bonds (with taxing authority) that have the financial ability to pay the principal (at maturity) plus every interest/dividend payment should reduce your principal risk.

But there are ways you can also reduce your market risk. Start by asking, “What could cause my principal value to decline during my holding period?” One big reason is inflation or an increase in interest rates.

Therefore, to hedge or minimize market risk (principal volatility), you would want to purchase a security that moves in the opposite direction of the security you purchased for income. When one security goes up in value, the other goes down. This should leave your principal “flat” while you collect the higher interest rate.

Stocks too, may require a different strategy

A protracted slow growth period for the economy will have its effect on stocks as well. It may be very difficult to increase revenues, maintain margins and earnings, etc.; so you may want to consider stocks that are not dependent on the economy for growth.

Look at companies that have a product or service whose success depends on the growth and acceptance of their product rather than on the success (general growth) of the economy. It helps if they are not limited to the U.S. economy only, but are able to sell worldwide. Also, in this environment, it might help if they do not need to raise money for the next few years.