Welcome to the new year.
I believe financial markets are set for another volatile ride. In fact, I’d be surprised if they weren’t crazier than last year.
That doesn’t mean you can’t make money…and lots of it.
So, should you have a punt?
Perhaps you’re already in cash, waiting for the green investment light. When will it come?
With plenty of options on the table, let’s wind back the clock…
Winding back the clock
At the start of 2016, aligning with the majority, I thought we would see a choppy year. I didn’t expect a crash, or argue for one, at any stage last year. I did, however, expect and argue for a deeper stock market correction at certain stages.
While a ‘deeper’ correction didn’t come, it’s worth noting the first week of 2016. US stocks marked their worst-ever start to a year. The Dow Jones Industrials Index plunged about 1100-points, or 6.2%, in the first five trading days.
Remember, the US Federal Reserve raised rates in December 2015. It promised to do so again another four times, which was a daunting prospect. Meanwhile, Chinese stock markets were in meltdown. The combination spooked financial markets.
The world sold stocks…
The Dow plunged to a low of 15,660 points by 11 February. It marked an official ‘correction’, totalling 10.1%. It wasn’t as ‘deep’ as I had expected. The Bank of Japan moved interest rates into negative territory for the first time, softening the blow. Chinese markets started to recover.
The ‘correction’ was short-lived. Punters expecting a ‘crash’ remained on the sidelines and missed the enormous rally into year-end…
The Dow posted a 13.4% gain for the year — its best gain since 2013. It ended the year at 19,762.60 points.
Could the Dow Jones surge past the 20,000-point psychological level this year?
It could even hit 22,453.20 points. That’s 19,800 points (current market level) multiplied by 13.4% — the same return as last year.
The Dow might surge higher…
It may have already peaked.
I don’t really care what happens next. While I still expect a stock market correction in the short term, which I argued for late last year here, I’ll just trade the opportunities as I see fit. That’s how you should trade the markets.
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How to invest with confidence
Unlike the majority, I recommend embracing a bit of volatility. It provides trading and investment opportunities.
The key is to remain fluid and open-minded. That should keep you on the right side of the trade.
Easier said than done?
During a stock bull market like today, and assuming a correction, ‘buying the dips’ has proved a profitable strategy. Unfortunately, most punters are scared to ‘buy the dips’. The majority invest emotionally, expecting the worst. When markets turn lower in fear, punters believe the trend in motion will stay in motion.
When financial markets move in the ‘wrong’ direction, most punters like to get out, waiting it out instead.
I don’t recommend investing, unless you have the confidence to do so.
Unfortunately, most punters have confirmation bias and never gain the confidence to buy back into the market. If financial markets move in the opposite direction from their opinion, they expect a ‘reversion to the mean’.
That rarely happens.
Financial markets aren’t welcoming. Period.
If you think you’re smarter than the market, it will chew you up and spit you out. Sure, you might get lucky a few times; but you’re likely to lose a lot of money. Financial markets don’t care about your opinion, or how much money you have.
And sure, you can be right. But you can also be right and broke.
Don’t ignore the market truths
The Dow Jones has seen a seven-year bull market. That’s the big-picture story. It’s screaming at us in the face — don’t ignore it!
A lot of punters have shorted the entire rally and missed out on the most profitable bull market in history.
That has been a gigantic mistake. Backing this bull market could have made you a fortune. To think, there have been few corrections along the way. Or major worries of concern.
Of course, a raging bull market doesn’t rule out another correction in the near term. If it comes, and I believe it will, I recommend closing your eyes and buying some shares. The bull market could go a lot higher. Take a look at the daily chart for the Dow Jones Industrials Index:
Source: Interactive Brokers; Resource Speculator
[Click to enlarge]
The above chart shows the ‘Trump’ stock rally following the US election. US President-elect Donald Trump will be inaugurated on 20 January. With the stock market surging following his election, while it could happen, don’t bank on it crashing into the inauguration date.
Despite popular wisdom, Trump hasn’t, and won’t, crash the stock market. In fact, Trump is unleashing the biggest corporate tax cuts in history. That should drive a lot of money into the US and, potentially, send the market rocketing to new highs this year.
Of course, as I said above, you shouldn’t rule out a short-term correction. At the moment, the stock market is consolidating within the pink channel. It also remains above the blue upwards channel.
The stock market must close below 19,720 to signal a correction to the 19,000-point level. A closing below 19,650 should be the kiss of death. I’d start buying around the 18,600–18,800 level. There’s a lot of support down in the 18,000-point region. So, don’t expect a massive selloff just yet. A close above 19,952 should signal new highs.
You could cash out of the market and wait to see what happens next. Or just ‘trade the trade’. But don’t expect a major crash or capitulation just yet. If the story changes for the worse, I will let you know.
Yes, we’re likely to have a volatile 2017. But if you’re waiting for a stock market crash, choosing to stay out of the market, you won’t make much, if any, money. That’s being close-minded. The world’s best investors remain open-minded at all times; anything can happen.
So, while the financial market could see a correction, there will be plenty of investing opportunities this year.
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