By George Leong for Investment Contrarians
When I look at this market and how it has performed to date this year, I’m somewhat encouraged and surprised at the same time. While the advance has been decent, I continue to wonder why traders appear to be underestimating the overall stock market risk, which could lead to investor mistakes.
The third-quarter earnings season will likely be weak on both revenues and earnings. We are seeing more major companies slash jobs to compensate for the lower business volume.
I can tell you, considering my trading strategy and my desire to avoid investor mistakes, I’m taking some profits off the table, especially on some of my bigger winners; at the same time, I’m leveraging put options as a hedge against the potential vulnerability I see on the charts to avoid investor mistakes.
The charts are at a crux with technology stocks and small-caps turning lower as the market risk increases. So far, the NASDAQ is down over two percent in October and its gains from the end of the first quarter have disappeared. Moreover, the NASDAQ has broken below its 50-day moving average (MA) at around 3,084, and it is threatening to move lower, based on my technical analysis. The same situation is occurring for the small-cap Russell 2000 index, which is sitting just above its 50-day MA. With the Relative Strength Index (RSI) weakening, I would not be surprised to see more downside moves, so be careful to avoid investor mistakes.
I have talked about the earnings season and the market expectations that growth will be muted and driven more by cost cuts than revenue growth. Keep this in mind to avoid investor mistakes.
Moreover, there is still the uncertainty of the upcoming “fiscal cliff” in January when automatic budget cuts and higher taxes come into effect. The concern toward this will likely affect the spending habits of consumers and cap how much they will spend, until there is a resolution following the U.S. presidential election in November. The reality is that the market is clearly underestimating the fiscal cliff’s potential impact on the U.S. economy, which could lead to investor mistakes. I’m not.
The market applauded when the September unemployment rate fell below the eight-percent threshold to 7.8%. But while the jobs numbers were encouraging, the jobs market is a long way from being healthy when compared to the historical readings. Good luck to the next president!
If the uncertainties in good old America are not enough to spook you, take a look at the dire situation across the Atlantic in Europe. Here we have six of the 17 eurozone countries in a recession. According to the International Monetary Fund (IMF), the eurozone as a whole could contract by at least 0.2% or even more in the third quarter, followed by an additional 0.2% contraction in the fourth quarter; technically, this would be classified as a recession, so be careful to avoid investor mistakes.
The IMF is supporting the idea of allowing Greece and Spain additional time to deal with their budget deficits. Unemployment in both countries stands at around 25.0%, so it’s a tricky situation. Germany, the region’s biggest lender, is not keen on the idea (Source: “IMF urges Europe to put brake on deep budget cuts,” Reuters, Yahoo! Finance, October 11, 2012.)
Try to avoid the investor mistakes others are making, as I feel the eurozone situation is dismal and will require years to resolve. If you don’t believe its impact on the eurozone, just take a look at its negative impact on China, where the World Bank cut its estimated GDP growth for China to 7.7%.
If you still don’t believe the risk and or recognize the potential investor mistakes after reading this, then you are much more optimistic than me.
Posted By: DAVID JOHNSON
Monday, October 22nd 2012 at 11:56PM
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