A Flock From Stocks: How to Gain in a Losing Streak

With the equity markets more volatile than ever, most investors are worried, cautious, and uncertain about what lies ahead. The DJIA moved down nearly 500 points over the month of May among unfavourable investor sentiment regarding the global economy. While there is much unpredictability about the future for equities, its simple to see that this extreme volatility is very much influenced by human psychology, strategy and utter emotion. No longer are these markets subject to industry fundamentals but rather, the pessimistic news coverage that is driving investors to flock from stocks and move to more stable investments like government bonds and gold. If you're looking to win in this market, it is crucial to play the strategy card above all else. At this point in time, traditional investment strategies leave you at risk of getting eaten alive.

To understand what is going on in the stock market, you need to understand that just like you and I, people want to make money and make up for their losses as quickly as possible. Keeping this in mind, dissecting and simplifying the market can help to make patterns more predictable. By reading into the implications of major news stories, a major driver of this market, it is possible to make smarter investment decisions ahead of the herd. By using common sense (oh how far typical investment strategies have come from this), it is much more simple to see where things are headed. With so much negative news around the world and very little light at the end of the tunnel (at least in the near term), it is crucial to make the best of opportunities as they arise. In this type of environment, you need to be an active trader and protect yourself from what potentially lies ahead. I have a few recommendations to help get your portfolio back in the black.

My first recommendation is don't buy long term! I truly believe this market has yet to bottom out because investors are standing along the sidelines and moving their money out of equities until things clear up. The stubborn long term investors have still yet to make their way out of this mess but when they do, prices will only fall further. If you see a good opportunity to buy based on favourable news or sell-short on a hunch, it is always best to clear all of your trades by the end of the day to hedge against the risk that tomorrow brings. Be humble and admit you don't know what's ahead because in reality, nobody really knows what will happen tomorrow (oil spill anyone?). The events we can't and don't predict are the ones that affect us most! In a precarious environment like this, it doesn't hurt to close your trades before 4:00.

My second recommendation is to be a strategist. Think like you aren't an investor and be unconventional. To be a successful strategist, you need to be aware of common trends and take advantage of them. For example, right now investors have been acting in a rather predictable way. As soon as the market seems to be gaining momentum, traders pare their losses by selling while the market is up. This is the primary reason why the last few hours of each trading day have been especially downward trending. By using good shorting strategies, you can come out on top after the indexes have peaked. Keep your eye on how people have been treating certain news and if you see a trend, play it to your advantage.

My last recommendation holds for both bull and bear markets... Don't be greedy! Considering most indexes are averaging losses each and every day, take whatever gains you make and run with them! If you're greedy and try to suck more gains out of your current trades, you can easily reverse any gains you may have made in only a matter of hours. Set a realistic percentage gain goal for your investments and as soon as you achieve your goal, sell sell sell. While you may only make a half a percentage here and there, this can quickly add up if you are an active trader. To be successful, you can't look back in hindsight and regret making trades too early. Be happy that you came out in the black and be thankful you didn't end up like the investors who were greedy and paid the price.

Investing Tips:

Avoid Stocks and Corporate Bonds: Going forward, I am bearish on investments in equities and corporate bonds. With the likelihood of a double-dip recession only rising, the stock market is a dangerous place for your investments. During this time, the best way to play equities is to short-sell. I am also skeptical that U.S firms will be able to continue to issue debt via bonds as I feel the principle and interest payments will become a major burden for these companies. With decreases in global demand and hindered productivity growth, meeting their bond obligations will be a growing issue among institutions. If you are still interested in corporate bonds though, look to multinationals who have growing stakes in China and other developing countries where consumption is likely to increase in the coming years.

Go Gold: Even with gold hitting new highs today, I think this is just the beginning of the gold rush. In the months ahead, the debt problem for major governments (particularly the U.S) will cause investors to seek refuge in what has always been the safest investment and best hedge against catastrophe. I predict that the United States debt concerns will begin to unravel in the coming months which will drive gold to new highs. As the U.S economic recovery continues on its rather stagnant growth path, the truth about the difficulties for budget reform will weigh heavily on investors minds. This will scare U.S bondholders (bonds being the current safe-haven) and this will ultimately cause investors to turn more and more to gold and/or other precious metals. Since the gold mining stocks and ETFs are still highly influenced by the overall stock market and its downward momentum, I would avoid such investments. Instead I would look into gold futures and bullion.

In the next 2 years, I can see gold reaching new highs of approximately $1,500 or more an ounce. If you are overweight enough in gold, I would look to achieve at least a 20-30% gain before selling. I believe the eventual rush to gold will very much depend on when the U.S debt crisis is fully realized and/or the U.S has to put in place major spending cuts or increased taxes. In the worst case scenario, if you have no issues with the potential for only 5-10% annual growth in your gold investments, I would highly recommend making this investment in the very near future. Note: waiting for a bad day in gold is a good strategy, its nerve-wrenching to buy after a plunge but considering the usual trends it will likely pay off.

Where do you think the market is headed? Are you a bull or a bear? Leave a comment and let me know what you think...

- The Watchdog