By George Leong, B.Comm. for Profit Confidential
A friend of mine called me last week and asked what I thought about the current stock market action.
I asked why, and he replied that he has been making tons of profits and wonders what he should do. This is a question I get asked a lot, and while my answer may be boring, it's always the same: this is not a normal stock market and you are making easy money, so enjoy it.
But then there's always the question of whether to add to positions and take advantage of additional market gains. That's because the Dow is headed toward 60,000 and the Federal Reserve is going to let the money presses go on printing. (See "Why Dow Jones 30,000 Will Become Reality; But What You Should Know First.")
Of course, I'm being a bit facetious. I'm bullish at this time, based on the charts and my technical analysis. At the same time, while the issues in the eurozone and China are not hot items, there is still risk in these regions that could provide some challenges to the stock market.
Look, I told my friend to enjoy what the market has given him; by this, I mean take some profits and enjoy the fruits of your labor. The last time money was so easily made was 1999, and you know what happened soon after. I'm not saying the same will occur now, but I do believe you should reap some of your rewards. I told my friend to take some money off the table and buy something for himself and his family.
"Take a vacation," I said.
"I would miss the gains to be made in August," he responded.
To which I replied by noting that the stock market was likely to be flat in August, so he could enjoy his vacation and there wouldn't be much he'd miss.
As a trader, the key is to build your asset base so you can make more money on better trades in the stock market. Yet at the same time, you also need to be prudent and absorb some of the gains. The stock market has risen so high so far that I firmly believe there will be a buying opportunity on the horizon. I can't tell you when and can't guarantee it will happen, but as a trader, sometimes you need to bet on the sure thing-and right now, that's the stock market's current record highs.
My view is that, based on the advance so far and my analysis, the stock market cannot simply continue to move higher at the same rate it did from January to July. That is, unless you feel the Russell 2000 will return 40%. But I simply doubt that. I think there's a downside risk of about 10%, especially when we find out the country's gross domestic product (GDP) growth will remain somewhat sluggish.
So as I said to my friend, take some money and enjoy yourself. Life is short and you can't take your money with you when you leave.