Back on Oct. 1, when the S&P 500 was at 1,136, I gave you four reasons why I thought stocks were still cheap. Today, even with the index almost 90 points (8%) higher, I still believe you should be buying certain U.S. equities. If you have been reading Smart Investing Daily regularly, you know that Sara, our guests and I try to offer you real, practical, actionable advice that makes sense.
Figuring the Financial Market Out Is NOT Impossible
We often forget what is behind the financial market’s proverbial curtain. Behind all the numbers, algorithms, earnings, charts, forecasts and analysis is one thing that makes it all come together and offers rationale for all these seemingly random numbers and patterns: the human mind.
What separates the greatest traders and investors in the world from the average investor is that they understand the way the human mind works, especially when a bunch of minds (people) are gathered in a crowd. Crowds of people, with similar intentions or motivations often behave in ways that may be contrary to their normal personalities and decision-making processes.
You don’t need a Ph.D. in psychology or a mathematical mind like the great John Nash to get an idea of the current “crowd” mentality. A few clicks of the mouse, a bit of television and the ability to really listen is all it takes. Now, I’m not saying that if you listen to anyone offering advice on the financial markets that following their guidance will make you successful, because that certainly is not the case.
There Are Four Gauges You Need to Follow
Adages — Get to know the financial market’s beliefs; axioms like “Santa Claus Rally” and the “January Effect” may seem like cryptic old wives’ tales, but there is not only reasoning behind them, but often blind faith. Believe it or not, statistics show that both of these upcoming bullish events have proven to be at least somewhat true and if the financial market has an overall positive tone, that should only accentuate these beliefs. Check out the Stock Trader’s Almanac to learn more.
Tone — This gauge is a bit more difficult to get, because of the ever present noise. I find the financial market’s tone by listening to the most well respected and widely followed analysts like Abby Joseph Cohen of Goldman Sachs and Warren Buffett of Berkshire Hathaway for example, both of whom have tremendous influence over the financial marketplace.
Right now, both believe that equities are set to move higher and have offered bullish commentary overall. I also read major publications like The Wall Street Journal and watch networks like CNBC to get an “average tone” of the experts offering their commentary. My peers here at Taipan are also a well-diversified resource for viable information.
The mass media’s commentary seems to be moderately bullish still. Of course, the “doom and gloom” bears will always be there. Listen to their points as well and weigh all arguments. Logic, for most of us, wins in the end. From what I have gathered, the overall data is mixed, but generally points to recovery and higher equity prices.
Tone can also come from financial market reactions to events. Take last Friday’s abysmal jobs number, which I thought was sure to send the markets plummeting. Instead, the Nasdaq, S&P 500 and the Dow all finished slightly higher. This tells me the bulls are in control at the moment and are willing to shrug off what many consider to be a major, albeit lagging, indicator.
(By the way, investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Sara Nunnally simplify the market with our easy-to-understand articles.)
Technicals — On the way up or down, you must pay at least some attention to the charts. Not because some random lines on the screen tell us exactly what will happen, but rather they can be the “street signs” alerting you to speed up or slow down or that there is a dangerous curve ahead. It’s not about the lines themselves, but that enough people believe in those lines and numbers that they often become a self-fulfilling prophecy.
Many of our research services here at Taipan are focused on mastering and profiting from these technical patterns. Don’t ignore them; find a reputable source and listen to them.
Overall Fundamentals and Past Sentiment About Them — At the end of the day, companies should be making money and increasing the amount of money that they make. Don’t dismiss fundamentals on a high-flying stock. Easy come, easy go, and if a company is losing more and more money and their stock has not yet responded, a correction may be coming.
This holds true for the overall market as well. If you want to go long the broad market with an ETF like SPDR S&P 500 (SPY:NYSE), do a quick value checkup, especially right before and right after earnings season. The price/earnings ratio is simply the price of the index (SPX shown below) divided by the overall earnings of the companies in that index. Since 1900, the average P/E ratio for the S&P 500 index has ranged from 4.78 in December 1920 to 44.20 in December 1999, with an average right around 15-16. Right now, that number is slightly elevated (just above 20), but this is typical when growth is expected.
Buy Cautiously Up Until Mid-January
If the S&P 500 can get above 1,227 and close there, I believe there will be a short-term continuation of the rally that we have been experiencing into the new year. The gauges are still pointing slightly bullish, although the speed limit has been dramatically reduced. We will have to wait until January when the next earnings season kicks off to see if Santa brought gifts or coal to the marketplace.
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