Thursday, October 19, 2017

The Stock Market Is A Small Watering Hole With A Giant Croc

What's up my peeps!  The Dow 30 crossed 23K this week like a meant to be love story.  We're all both enamored and mesmerized by this never say die market.  You're either in it for fear of losing out and making money OR out of it for fear of losing big, not making any money (from equities), and wondering when you can finally yell out, "I told you so!" to your sanguine friends.  I'm still in the market, but like every other investor, have taken precautions to dampen the damage from a market crash.

Crocodile at Africa Watering Hole cam. 06 February 2017 - YouTube

Speaking of crashes, this week also marks the anniversary (Oct. 19, 1987) of "Black Monday," the great 500 point drop in the Dow index that destroyed billions in wealth in one fell swoop.  I was eleven at the time, enjoying 80's sitcoms like Alf, Family Ties, and The Cosby Show.  This Black Monday anniversary was especially eerie, however.  Every major financial media company kept comparing today's long in the tooth bull market to that fateful day in '87.  Will a crash like Black Monday's happen in today's high-speed trading era?  Supposedly there are built-in "market circuit breakers" that are supposed to trigger a stop trading switch.  CNBC explains it all in this article.  Do you trust these kill switches to work?  I don't.

How I'm Trading

I've recently taken to a hit and run type of trading strategy.  It reminds me of a safari watering hole with a giant crocodile (the market) lurking in the water.  The non-institutional investor is like a thirsty impala, risking it all for a life-giving drink of water (making money).  Before putting its mouth in the water (trading) the impala has to look around cautiously for both land and water predators.  It slurps as much water (buying) as its nerves allow it to before running into the safety of the grassland (selling).  The giant crocodile will one day get its meal, consuming all of the tasty impalas (a crash), but this doesn't have to happen tomorrow.  

Image result for impala at the watering hole
Oops, a pre-retirement investor stays long the market!

So what I'm doing is maintaining a mostly cash portfolio while making small trades ($500-$1000 each) lasting less than two weeks before I sell.  If the stock I bought doesn't make a 2-3% price jump within this 1-2 week window, I get out and try another trade.

For example, I took a $909 position in Proctor & Gamble (PG) on 10/10/17 right after the vote on activist investor Nelson Peltz took the stock down, and sold it on 10/16/17 for $931 once the stock normalized.  Quick $22 gain.  Not a whole lot of money I know, but it is in line with my current strategy.  I bought $753 of Comerica Inc (CMA), a regional bank on 10/17/17, and am currently up $20.90 representing a 2.7% gain.  If the stock opens higher tomorrow, I'll execute a sell order.  Again, the theme is little victories here with small quantities of invested cash, keeping most of my cash off the table so that it's ready to be invested in the event of a massive crash.  Feel free to critique me for trying somewhat to time the market.  Hey...I'm 41 not 21!

What Can Derail The Market And What Are The Odds?

Image result for derail

As a stock market investor, you must always be weighing systemic risks.  It's impossible to factor in risks you don't know exist, but that shouldn't stop you from attempting to weigh the odds of certain events happening in the world, economy, etc.  Take the following three possible scenarios into consideration:

1)  War with North Korea.  I'm not a military expert, but a Google search produced a former NATO military chief giving a nuclear war a 10% chance and a conventional war a 20-30% chance of happening.

2)  Congress failing to pass Tax Reform (tax cuts for businesses).  Goldman Sachs gave the likelihood of an agreement on tax reform happening in 2018 a 65% chance.  Meaning the odds of failing are 35%.  Personally, I think the odds of this event happening (a failure to pass tax reform) are much higher, say, between 45 to 70%.  I blame terrible leadership.

3)  Rate hikes from the Fed slowing the economy down.  Yellen seems to think we're in the clear and inflation will rear its ugly head anytime soon...except it isn't.  The Feds fund rate (the interest rate at which the Fed reserve banks lend to non-fed banks) is currently 1.25% and there is a 100% chance the Fed will raise to 1.5% by the end of 2017.  This will take a little juice from corporate earnings (cost of borrowing capital increases) and lower current ratios (current assets/current liabilities), a measure of a company's ability to pay its short and long-term obligations.

If a market crash happens, I therefore bet the culprits will be interest rate hikes followed by a failure on our politicians to do what they said they'd do with taxes.  I also think we make it out of 2017 alive my impala friends.  The croc won't have us for lunch until 2018.  Until then...don't be afraid to drink at the watering hole! 

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