How Much Math Does An Econ Major Need To Know Investing – Preparing for the Next Bear Market

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Investing – Preparing for the Next Bear Market

Reading the investment tea leaves

What do the ‘Tea Leaves’ tell us: “The sky is falling?” No, wait, shake the glass again… “The sky’s the limit?” Now that’s the answer we want!

If investing and trading were that simple, we could visit a reader for a few dollars and know exactly what the future holds. Unfortunately, if you ask three readers what their sheets say, you get three completely different professional opinions. Consistency is not his forte.

First, I’ve never made any public predictions about the future direction of the economy or the market before and I don’t intend to start now. Also, I’m not a stock market bear, I’m not a bull, I don’t have any silly buttons to hit that make all kinds of stupid noises to tell you to buy – buy – buy, and my dart board really. it is a dart board and not a stock selection device. I don’t think Chicken Little was ever a good prognosticator and I don’t think the world is going to end tomorrow. But 25 years of market watching experience tells me there are some things individual investors should be concerned about.

We filter out the generalized, sensationalist noise of every current brand on the market, up or down. We’ll leave that to the Talking Heads with their TV cameras and a cup of tea leaves; it gives them something to do and keeps them from bothering us. We want to focus on the big picture, the major events and how those events are likely to affect the economy and ultimately the future direction of the market. Hopefully, you can get some insight into what might happen and how you can prepare.

Let’s look at some of the main factors.

For example: unemployment, foreclosures, the housing market, the mortgage crisis, the dollar, the EU and gold, just to name a few.

It’s not Rocket Science, simple common sense says the housing market won’t improve until foreclosures stop being a problem and foreclosures will continue to be a problem as long as unemployment doesn’t improve. With 25% of homeowners currently down on their mortgage (ten more than the property is worth), the light at the end of the tunnel for foreclosures remains attached to a big moving object with a very loud whistle.

As you already know, the mortgage crisis is far from over. In other words, all those junk mortgages that were packaged up and assigned to the unsuspecting, were not paid in full by the happy owners, the money is still owed; there was only a small adjustment in the accounting method because now they look better on paper. Let’s move on to another indicator.

With housing, mortgages and foreclosures as a backdrop, now consider the price of gold. As you know, gold has broken and continues to hover around $1400 per ounce. You have to ask yourself, what would this cause? Realizing that supply and demand ultimately set the current price, the apparent increase in demand for this precious metal is probably not because your dentist has been too busy filling cavities or your jeweler has been planning for increased holiday traffic. So it really only leaves one logical conclusion. Concern for currency, the greenback in particular, and more particularly, its value. Forget the few newbie traders who start buying gold at current prices hoping the price will double overnight and get rich quick, if they don’t lose their money there they will lose it in a other place It is your destiny. What concerns us is the big picture. And the big picture tells us that this is not a good indicator for the economy to say the least.

There’s an old saying, “If you want the truth, follow the money.”

Aside from currency concerns, investors worried about grabbing gold, or Mr. Bernanke and his proverbial helicopter handing out greenbacks to everyone but you and me, what are the pundits doing?

You know, the ones that should be ‘To know’ and have a handle on what the economy is likely to do and what effect it will have on the market, not to mention the impact it will have on your company’s share price. I might add that I find it interesting that giant companies like Microsoft, Hewlett Packard and others have recently made headlines for seeking out and hiring top economists outside of places like Harvard. Why would they develop such a sudden interest in economics professors?

In addition to that, let’s see what the real experts are doing with their stocks.

Insiders, of course, are the officers, directors, and principal stockholders of a company. Those who get a first-hand look at orders, sales, projections, etc. They are also required by law to report almost immediately to the SEC whenever they have bought or sold shares of their companies’ stock.

Well guess what? They have been on a sales frenzy. Selling shares of their companies’ stock at a record pace not seen since early 2007. Let me remind you that this was just a few months before the Great Recession began.

The Vickers Weekly Insider Report analyzes insider data each week and calculates a ratio of the number of shares these insider executives sold that week to the number they bought. Vickers Weekly says that over the past four decades (40 years) this ratio has averaged between 2 and 2.5 to 1. Any reading above 2.5 to 1 is an above-average selling pace for experts , and it should also be an eye. – opener for the investor.

Now, keep in mind that these users were selling at a record pace in early 2007, and hold your breath before you read what that sell-to-buy ratio was in the second week of December 2010. 7.07-a-1. In other words, corporate insiders sell more than seven shares for every one they buy. Just to show that this is not an anomaly, just two months ago the sell to buy ratio was 5.29 to 1, and it has obviously increased since then.

Another factor that the individual investor should consider when thinking about the “big picture” is bear markets. I know, no one wants to think about rallying the market and wiping out an average of 29% of your investment account value and then having to wait a couple of years to recover. But like it or not, over the past 100 years there has been a bear market on average every three and a half years (3.5). They occur like clockwork, last an average of 18 months, and then leave investors waiting another couple of years for their investment account balance to return to the black. Need I remind you that the last Bear Market started in 2007? You do the math.

So what should you do? I’m not suggesting you call your broker and sell, and I certainly don’t want to sound like Chicken Little, that’s not my style. But I do think you should pay close attention to market indices, tighten your stops, prepare for the worst and hope for the best. When I wrote the books “Charting and Technical Analysis” and “Common Sense Investing”, this current market scenario is exactly what I wanted to prepare the individual investor for. And more importantly, how to avoid the dredging of portfolio destruction caused by market downturns. Another very important thing to remember is that your financial advisor will never tell you to sell. Protection of your investment money is yours alone. So either educate yourself about investing and have the knowledge to make your own investment decisions or keep your hard earned money in the safe bank. It’s your choice.

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