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Stocks Up 75% from 2009 Lows... Now What?By
Wednesday, March 24, 2010
Last week, I told my paid subscribers, "It's time to turn our brains back on."
Look, we started playing offense a year ago. But now it's time to play some defense and protect what we've got.
If you've followed my advice, you bought when everyone else was scared... AND you held.... You didn't sell even as everyone else got nervous about the rally. So you should be in fantastic shape. You caught most of the huge move in stocks.
It's been crazy in the last year. Protecting yourself now only makes sense. The numbers tell the story...
U.S. stocks are up 75% from last March's bottom to today. Emerging markets like Russia and Brazil are up over 100% in dollar terms. Commodities have soared, too... Oil is up 57% in the last year. And copper is up 88%.
Funny thing, though... A year ago, when I was strongly recommending you buy everything, nobody wanted in. Now that everything has soared, everyone wants in.
As proof... My friend Jason Goepfert tracks investor optimism better than anyone else around. (You can see his work at www.sentimentrader.com.) Jason boils down much of his work into "the smart money" and "the dumb money."
When the dumb money is scared, it's time to buy. Jason's Dumb Money Confidence indicator hit its lows for this year (42%) at the beginning of February. A week later, the market hit its low for the year.
When the dumb money is excited, it's time to sell. Jason's Dumb Money Confidence indicator hit its high for the year in early January. The market peaked less than a week later.
The market has now passed its January peak. And Jason's Dumb Money Confidence indicator hit 71%. It's only been higher on two days this year... the days before the January market peak.
When interest rates are at zero, and the market has soared for a month straight with very few down days, investors get reckless. We've reached the point where speculating in stocks is like picking up nickels in front of a freight train. It's a dangerous game.
The important thing to do right now is to NOT just sit back and just let things happen to you...
Instead, take a couple easy steps to protect your money. Figure out your trailing stops, now. For help with portfolio management, get going with TradeStops. Also, consider implementing a simple system to manage a portion of your money right now. Get my friend Meb Faber's system going, for example.
And when you close out positions, know what you're going to do with the money. Two fantastic ideas are converting your traditional IRA to a Roth (which will require a tax payment to the IRS, but it's really worth it) and setting some money aside to buy county property tax certificates once they become available (usually in May, check with your county Clerk of Court).
We have to turn our brains back on and act, not react.
The easy money is over. It's time to play good defense with your stock positions... establish your trailing stops... and only invest in things with limited downside risk from here.
Good investing,
Steve
Further Reading:
Steve isn't the only one reminding DailyWealth readers to keep an eye on the downside. Our colleague Dan Ferris watches three numbers to gauge how risky stocks are. As Dan showed us earlier this month, all three are way out of "safe and cheap" range. Get his read on the market here: Why You're Crazy to Buy an Index Fund Right Now.
For now, Steve is hanging on to the speculations that are working. But if the music stops, he says, STOP DANCING. That's something even the world's greatest investors have trouble with. Find the full story here: Even the Best Investors Make This Huge Mistake... Make Sure You Don't!
Market NotesA CHECK ON THE MOST IMPORTANT INTEREST RATE IN THE WORLD Today, we check in with one of the most important numbers in the world... the yield on the U.S. 10-year Treasury bond.
The "10-year" is the most widely followed gauge of how much interest Uncle Sam must pay to borrow money. Many analysts, like our colleague Porter Stansberry, expect this rate to head higher.
The higher interest rate argument says the U.S. government is racking up huge debts right now... and just as a bank would demand higher rates to loan money to the town drunk versus the town preacher, Uncle Sam's creditors will eventually demand higher rates as well.
Below is the past two years of the 10-year yield. In the last nine months, the 10-year yield has fluctuated between a high of 3.94% and a low of 3.17%. But in a series of "higher highs and higher lows," this number has crept back up to the 3.6%-3.8% area.
Keep an eye on this number. If it pops above its 2009 high and reaches 4%, it's a sign the "higher interest rate" crowd is right... and Uncle Sam is going to have some ugly interest payments ahead.
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