If you were paying attention to the economic data over the past few weeks, you certainly were aware that the risk was to the downside regarding the non farm payrolls report . Depending on if you are an investor or a trader, this had ramifications for you.
For the investor, I always preach defense and laugh when people say that I am a trader and that I am risky. I look at them with a straight face and say investing for the long term without a knowledge of some technical analysis seems a lot more risky. Remember, basic technical analysis is just like reading supply and demand, and with a realistic view of moves in "percentages", you start to get a feeling of overbought and oversold. Now don't get me wrong, investing for the long term can be profitable even if you turn a blind eye to technical analysis, but how has your portfolio performed over the last 10 years?
So for the investor who has seen the SPX move over 100% to the upside in 3 years, maybe you should be comparing those percentage gains with historical gains. Historically, the stock market returns roughly 5-10% per year, depending on who you ask and how much you are paying for someone to achieve those returns.
Add to that a bit of fundamental analysis and technical analysis and you realize that over the past few months data has been under-performing and the only time the stock market rises is when the Federal Reserve speaks about further Quantitative Easing measures. Your investing plan may have been:
1. lighten up as resistance is pretty strong at the 1420ish level in SPX
2. buy protective puts to protect the downside risk of the portfolio
3. use available cash to come back into the markets at lower levels.
I like all 3 of these strategies. For most investors, though, option number 3 is the most likely scenario. I look forward to implementing strategy number 3 on certain sector ETFs and stocks. This is where the fundamental and technical analysis comes back in. Let's review three options for investors to analyze prior to putting cash to work:
1. United States Oil Fund LP (USO): I really like buying a commodity as it gets cheaper. Currently, oil prices are falling from 106 to 98 per barrel. USO, which tracks oil prices just fell about 3%. Now we have to decide if fundamentally and technically, the new lower price is validated by our analysis.
2. First Solar (FSLR): I am definitely not a fan of catching a falling knife (see Research in Motion's (RIMM) chart), but I do look at value. Remember, to purchase a stock doesn't mean it has to turn around and go up the day you get into it. You are buying it because you think it is a good investment at those current levels. But just like a trader, an investor can have a plan. I know most of you have heard of Investor's Business Daily. Well, their investment philosophy has an exit strategy if the stock chosen as an investment drops more than 10%
3. Wal-Mart (WMT): This stock just increased its dividend and I have been talking about dividend achievers in my recent articles. If the stock market is going to "roll over" and under-perform after a great first quarter, then you have to ask yourself what types of companies do you want to be in? If the economy isn't growing, do you want to be in growth companies or more of a safe play like a company such as WMT? WMT can be defined more as a "utility" where it doesn't pop and it doesn't drop, it stays pretty consistent and pays a nice dividend to boot.
Going forward, the near term horizon provides us with: elections in Europe, more data from the US economy, interest rate announcements in the UK, among other reports. Keep you eye on the news headlines to help you decipher what sectors and companies will provide value to your portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
