Markets around the world have rebounded strongly with many up between 30-50% from the lows seen in early March. ‘Mum and Dad’ investors, many of who are still sitting on the sidelines, are starting to ask “Have I missed the boat”.
On top of the stronger financial markets, most of the world’s economies appear to be stabilising. Many companies also seem to be weathering the economic storm with better than forecasted earnings reports.
Governments, Central Banks and mainstream media are fanning the fire of growing optimism with constant reports of a turnaround. Growing world wide optimism is slowly enticing investors back to the markets.
Becoming a Successful Stock Market Investor
To be a successful stock market investor, you must learn to stand aside from the crowd and independently interpret the economic and financial (stock) market conditions with a view to understanding possible future developments.
To do this, you need to start developing your skills to critically assess financial and economic news. The news can be from various sources including government and central bank officials, economists, financial analysts and company executives.
Interpreting the current conditions
Many of the world’s economies have started to show some signs of improvement. However, it is ‘improvement’ in the form of a slowdown in the weakening of economic conditions (declining production, falling business profits, rising unemployment, declining consumer spending).
Positive signs of growth (increasing production and consumer activity, declining unemployment, etc) for many countries have still not materialised. There are some exceptions. For example, Australia is one of the few countries not ‘technically’ in recession, but even in Australia there are risks within the economy.
From a stock market perspective a great number of companies have exceeded market analysts’ expectations in both the US and Australia. However, it must noted that many of these companies have exceeded expectations that were coming from a low base.
Actual earnings are still along way off the pre-GFC (Global Financial Crisis) days. There are even some questions over the way some of these companies (in particular US Banks) have accounted for their earnings and profits.
Many companies have also bolstered earnings and profits through cost reduction measures (i.e. laying off staff). This could have an adverse effect on a company’s ability to quickly turn around when economic conditions do in fact improve.
And the Stock Market Analysts Say…….
Over the last few weeks an interesting trend has developed amongst a number of stock analysts. Many analysts have started ‘talking the stock market up’.
For example, one analyst recently remarked in the Australian Financial Review that “now is the time to be fully invested”. The analyst went on to say that “the worst is over” and “with the sharp recovery” those investors who remain seated on the sidelines “will miss the boat”.
So where are stock markets heading?
Markets have rebounded strongly from the lows earlier in the year. Economies appear to be stabilising their downward spiral and numerous company reports have exceeded forecasted expectations.
However, a closer inspection of the underlying market conditions shows that not all appears to be as healthy as expected.
The Chicago Board Options Exchange Volatility Index, know as the VIX is a popular measure of [implied] volatility in the S&P 500 options market. Last week the VIX jumped 12.25%, at the same time the actual S&P 500 index was also moving high. This is generally seen as a bearish indication (or an indicator the stock market is prone to a selloff or retracement in prices).
Another worrying sign to emerge is the move by stock market strategists towards selling out of stocks seen as a safe haven in uncertain times (known as defensive stocks) and buying into riskier stocks in search of higher market returns.
Add all this to market analyst comments like “the worst is over”, “sharp recovery” and “miss the boat” and you start to see warning lights flashing.
Have you missed the boat?
Those who were brave enough to enter the market in March/April have done well for themselves. However, those of you who were happy to sit on the sidelines, now is not the time to get drawn into the market.
Markets always tend to overshoot to the up or downside. For those in the market, you may want to consider taking some profits. Those of you sitting on the sidelines are best to stay there for the time being. Don’t panic and don’t succumb to the fear of missing out.
Warning bells are flashing, and after an exceptional good run up, most markets are due for a decline (or retracement) back to lower levels. Then and only then will the time be right to consider entry into the market.
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