How can you use the news to make better investments? Today Bob interviews Matt Towery and his latest book Newsvesting – this is a must read for investors.
LISTEN TO THE INTERVIEW HERE
I wanted to post an update on where the market is right now because we crossed a key level again this morning. The more you cross key price levels the weaker the market becomes. First, let me give you a quick tutorial on how all of this works.
When I refer to the stock market, I am referring to the S&P 500. That is my index of choice. The direction of the price level of the stock market is very telling with regards of the direction of the market. Obviously, an increasing price level is a good thing and a decreasing price level is a bad thing.
The next thing that is important to know are key price levels. Above certain price levels things are good. Below certain price levels things are getting worst. I will just tell you the price levels. It wouldn’t be a good use of time as to how I came up with them. Plus, some of this work is proprietary from my end.
Finally, markets have a tendency to go up and down in patterns. These patterns can tell you a lot as to what is happening.
Here is a look at the market from this morning:
Above, you have two parrellel red lines. Literally since the end of 2014, the stock market has gone back and forth between those two parrellel red lines. If the market can go above that top red line, that would be positive. However, below that bottom line, is very negative. This morning we fell below that bottom red line.
Here are key price levels:
1869 – My studies show that this price level can be an early warning that we are in a bear market. If we stay below that number, the risk continues to increase that we are heading for steep losses. The ability for the stock market to get back above that level would be positive.
1707 – This is the bear market line in the sand. Below that price level and we are officially in a bear market. Thus far the stock market has not crossed that barrier. That is still quite a ways down from current price levels.
Conclusion – The risk level has greatly increased in the stock market. The inability for the stock market to recover is a troubling sign. If we do slide into the bear market, the losses are likely to mirror the losses incurred in the financial crisis. A Plan B investment plan is warranted.
January was not a good month for the stock market. Investment statements should be arriving in the mail any day now and they probably won’t look good. If you are traditionally invested in the market, you might want a few pointers before you approach the Mailbox. The biggest mistake that investors make is making emotionally charged decisions. When you filter decision making through emotions, your probability of making a good decision is very low. Read More
Could it be that the stock market is signaling that we are heading for a recession? If it is, that also means there is a high probability we are in a bear market. What do the experts say? As always, they see nothing wrong. Then again, you have to factor in that most of these experts are working for big Wall Street firms that are never going to say anything negative about the markets or the economy.
I have been writing about evidence that we are heading for a recession and sharing some information that I write about in my bi-weekly client letter. The ISM index might be telling us something.
The ISM Index
The ISM or the institute of Supply Management index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. Each month the index announces a score for the prior month based on the health of the above variables. The score can be from as low as 20 or as high as 75.
A number below 50 is a warning sign. A number below 45 has predicted 11 of the last 13 recessions. The last 4 months in a row have been under 50 with the latest (February 1) being 48.2. Here is what the index looks like:
Notice the trajectory of the blue line. The index has fallen under 50 and is inching closer to that key 45 level. You can see what happened during the financial crisis. It fell below 35. This latest reading is the lowest reading since March 09 (the bottom of the financial crisis)
Does it mean that we are heading for a recession? Not necessarily. However, it does issue a stern warning that the conditions are ripe for one. This indicator along with many others is starting to sing the same song. When a recession occurs, there are typically many indicators issuing warning signs all at once.
During recessions, the stock market falls and goes through a bear market before the economy is announced to officially be in a recession. Could that be the case now? Only time will tell.
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Keep the Faith
Business Insider published something last week that is a little worrisome when it comes to stocks. These are the clues that you look at to try and determine what might be occurring. The article was referring to the fact that the stock market had declined more than 10% from last year’s high point which is a correction. Unfortunately, that also happened last summer. The problem is that these two 10% corrections happened so close together.
Here is what the article had to say:
This is the second time in the past six months that this has happened — remember, stocks fell 10% in August in just a few days — and these two corrections in such a short time don’t look good, historically.
Any single correction isn’t, in and of itself, a problem, but the speed with which stocks dropped into correction territory almost back-to-back has been seen only three other times in the past 100 years.
And these are not years that market historians want to hear: 1929, 2000, 2008. In 1929, the Dow Jones started a decline that lost -86% in the value. In 2000 and 2008, the market were in bear markets that resulted in losses over -50%.
That is one of those 100% statistics to go along with a long list of indicators that would suggest the probabilities are high that we are in a bear market. Now Pop Culture Finance will tell you to not take any action to protect yourself and to just ignore it.
This would be like a meteorologist warning the TV audience of a Category 5 hurricane and then telling them not to do anything. It is an interesting comparison. With a hurricane, you are forecasting the potential of one hitting land from the indicators. The same goes with a bear market. Yet, with a hurricane they tell you to take precaution.
Due to the risk that is building in the market, I am opening up my schedule this Friday January 29th to anyone who wants to call my office and ask about their portfolio whether it be with a financial advisor or a 401 K plan. I am a little limited to the specific advice I can give due to the 20-minute time allotment. However, I can point you to resources and give you general advice. I am scheduling 20-minute phone conferences. If you want an opinion, send an email to ASK BOB and I will get you on the schedule.