Monday, October 22, 2007

Investing in times of uncertainty

By: Larry Swing
Markets move in cycles. Not every market is the same day after day. Opportunities exist but in small quantities. In times of uncertainty, opportunities are even less. We all invest in conditions where uncertainty is the norm. Probabilities are the only known factors to decide the likelihood of success of an investment. But real uncertainties occur when factors outside the technical aspects causing the markets to behave erratically. This comes from news, economic or corporate that are extraordinary, that influences the markets where technical aspects are greatly affected. News such as 9/11, subprime cash crunch, or corporate fraud at high profile companies. Economic and corporate news are drivers of market action, bombarding constantly causing emotional and psychological stress in traders and investors. This stress, in effect, causes them to act unpredictably.

The most uncertain periods in the markets happen when the cycles are in the midst of changing, namely, expansion to contraction and contraction to expansion. In the bull market, investors become more and more euphoric with incredible gains until their emotions blind their judgment. Once the market acts up with outside factors such as fundamental news, the market begins to sway easily from one side to the other. This is the period where the losses begin to accumulate. The investor first starts to believe the bull market cycle is over, he gets out. Then, in a few short days, the market recovers on good news; he immediately gets. A few days later, a conflicting bad news comes out, the investor changes his mind and sells short or get out. This period can go for months on end, going up and down in a range. This is probably where the gains are completely lost and probably more.

What can investor do? In times where news dominates the market, it's best to stay out. Why? No one knows what news and what kind of news comes out and, most importantly, how the market will react to them. Situations such as sub prime crisis, economic numbers released are inconsistent. One day, the numbers look good for one economic indicator; a few days later, another indicator is released with a negative number. (i.e. mortgage companies file bankruptcy while the consumer confidence remains high). Investors are at the mercy of the psychological and not logical effect of the market. The masses are swaying back and forth in a manic-depressive behavior. Dealing with a person with manic-depressive can be a challenging ordeal.

Let the market figure it out until the bombardment of news subsides. The market will seesaw, move at every little news, however insignificant. Highly nervous markets create tremendous volatility. Good news follow by bad news follow by good news again will get the investor getting more emotional. He will only join the rest of the mob in the market: the losing mob. Most of the investors who are in the market at this time are losing money, not only their nerves. This is the time when very little opportunities show themselves. If an investor intends to hold a stock for a few weeks but continually getting news in between, the only certainty is he'll get more news but doesn't know which way the market will go due to the news. Technically, the market will look very ugly, a zigzag of prices make neither head nor tail in the charts. To make sense of it all, it's best to view the monthly chart to figure out if the overall trend is intact or not. Try not to view lower timeframes just yet.

Unless the trading strategy the investor employs require him to enter the market during this period, he should not be involved at all. Months of September and October are usually the most volatile because they tend to be the tops or bottom of market action. Not only that, these periods every once in a while abrupt drops in markets, such as 1987 and 1989 market crashes. Unless he's experienced in dealing with this volatility, it's best to hedge his holdings or pull out completely and put the money in money markets. He won't lose money or sleep

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