To say markets around the world took a hit in May would be an
understatement. The question now is what are you going to do
moving forward? To answer this question you need to determine
bull market or bear market - which 'camp' you're in for both the
short-term and long-term.
The problem with determining whether you're in the camp of bull
market or bear market, is that right now we're in a no man's
land, depending on the technical indicators you use and which
fundamental data you depend on.
The two extremes are either that the market is going to turn
from near these levels, or we're moving into a bear market as
global economies slip into recessions.
But this decision is somewhat dependent on which markets your
portfolio is weighted towards, and how it correlates to either
the U.S. market or European market. Most emerging markets are
dependent on global commodities demand and imports from the two
largest economies, which needs to be taken into account when
choosing bull market or bear market.
On Friday traders watched, in some cases helplessly, as the
Dow gave up all its gains for 2012 in intraday trading. The Dow
Jones and the Dow Jones Global index are both now trading
under the 200 day moving average for the first time this year,
albeit the Dow Jones Global index has been trading below the 200
day for the last weeks now. Even the Fibonacci wave is sitting in
the undecided region.
Economic data around the world is mixed at best with
most significant data pointing lower. China seems to be coming in
for a hard landing which is very significant; China is basically
the world's manufacturer, and if they're slowing it means the
rest of the world has
begun to slow.
Not mention the Greek elections on June 17; whichever party
wins will control the market in the short term. If the
anti-austerity party wins, look for the markets to fall out of
bed, and if Greece stays in and honors its debt obligations, look
for risk-on in the short term. I say short-term because it still
doesn't solve any fundamental issues in the euro zone. Spain's
issues are much bigger than Greece, and Italy is much bigger than
Spain. See the problem?
Those in the camp that we are not done going down yet need to
protect themselves. The rule of thumb I use for this
scenario is: if my wife tells me "Let's take the day off and
leave our cellphones and iPads home to go play in the parks",
will I be able to unthread from my screens and not be looking to
slip my smartphone into the car? Then my risk is manageable.
The problem with a falling market and most retail traders is,
they want to make money and not lose it. Well ok, that's everyone
- but the point I want to make is that most retail investors do
not short the market correctly and do not realize the risk they
are taking on.
This is where hedging your positions through the options
market works well for retail traders. I explained how to do this
The three keys to options trading are
"delta, delta, and delta"
Why did my hedge not work?
I know not everyone's broker has options trading abilities, and
some have no long positions but are trading leveraged short ETFs
like the ProShares UltraShort S&P500 (
), but there are fundamental flaws in holding these types of ETFs
unless you use them in short-term trades, i.e. one day max.
I explained why futures and commodity ETFs have the deck
stacked against them in
What to beware of when trading commodity ETFs
. SDS and similar ETFs can cause you huge losses if you don't
understand what's happing. Hedge funds and large funds use this
ETF to push the market lower, and while they reap the benefit in
the futures, it can track the future only so well, and when those
big funds pull out - at the end of the day you are left holding
Be very careful with these types of ETFs. I for one can count
on one hand the amount of times I held SDS overnight, let alone a
weekend. But when friends of mine say "Oh my, you must be losing
in the market", and to their surprise I say, "No I made money
because I shorted the market" - it's usually through SDS.
Now what if you think we are nearing a market bottom? I
personally do not think we have enough blood in the streets yet,
and I think the market will not be able to really improve until
we clear the picture on the U.S. elections.
Again, my personal opinion
. But if you think we are in for a turn now, or when the time
comes and you think we are in for a turn, look for those names
that are on sale.
Strong companies with strong balance sheets, little debt, good
management, stock prices that have created low multiples, and
those that are near the 2008 turn. As the U.S. will most likely
drive the turn, look for companies here in the U.S. that have a
strong emerging market revenue stream like McDonald's (
). It fits the bill for me once price moves a little lower to
around $83 - $82.50.
Bull market or bear market - no matter which camp you're in,
trading smart is the key and Emerging Money has your back on
what's happening in emerging markets. It could very well get
uglier but we'll have the pulse on the emerging markets economy