It's amusing to see all the market predictions this time of year in the financial publications and on television. I know investors love this kind of stuff; the mystery of fortune-telling has a special allure. Unfortunately, many investors believe the "fortune" part of it and bet hard-earned money on these predictions, believing they can then sit back as the money rolls in. It almost never works that way.
Use these pointers to keep your feet on the ground as you read heady forecasts for 2007 while we head into the new year.
1. It's OK to read or listen to someone else's thoughts, predictions or analysis on the market or a stock, but you still need to do your own research. Many market pundits and newsletter writers try to predict what the market or stocks will do over the next year or two. They base their predictions on current information, which they feed into an analysis model.
Unfortunately, current information is extremely prone to becoming outdated by unforeseen events. Remember that an effective prediction of 12 months rides on sheer chance and that investing off predictions can be dangerous.
Before you do invest in a stock or other instrument based on these forecasts, make sure the trend and earnings confirm the prediction, because several high-volume distribution or accumulation days can change any trend.
2. Enter the new year with a plan that factors in capital management and risk management. These are the most important components of any trading or investing plan. Many investors and traders fail to understand that the most successful traders always protect and limit their losses and know they must take profits when a stock makes a sustained run.
3. Prepare to be wrong. Even the most-successful traders in the world are right only 50% to 60% of the time. The reason they are so successful is that they quickly cut their losses when they are wrong and stay with only those stocks that continue to outperform the market. If the general market is strong and most of the stocks in your portfolio are underperforming, you aren't in tune with the trends in the market. You either need to step aside or re-evaluate your strategy.
4. Be flexible. The surge in new hedge funds over the last few years has generated a lot more volatility in individual stocks. Trends in sectors or stocks may start to set up, then begin to fail for what seems like no reason. This is when traders need to quickly adjust their holdings to protect their profits.
5. Be aware of prevailing trends in the market. Keep part of your holdings in sectors that are bound to benefit from long-term events and trends, such as:
Health care and biotechnology: Will benefit from the aging population.
Defense: Will prosper as long as we have to deal with terrorism, which looks like a truly long-term issue.
Technology: Even though it is has underperformed during the last few years, we will continue to depend on new and advanced technologies such as nanotech.
Commodities: There have been three major commodity bull markets: 1906-1923, 1933-1953 and 1968-1982. The shortest run was 14 years. Commodities have been in a bear market for the past 20 years, until they bottomed in 2002. The latest commodity run is only four years old, so I doubt we have seen the end of the move. During the last three commodity bull markets there were large corrections, up to 50%. I expect the same this time: periods when commodities are dead money.
Oil and oil services: Oil is a commodity, but I wanted to address it and the stocks that relate to it separately. The long-term supply is probably coming to a peak, and long-term demand from emerging markets will continue to increase. Many oil stocks continue to trade at ridiculously low valuations compared with earnings. The group is in a slump at the moment, but as earnings continue to climb I believe that will change.
6. Pay attention to earnings trends. According to Zacks Investment Research, the S&P 500 is expected to be earn more than 12% in 2007. Sectors that Zacks expects to produce strong earnings are energy, especially service companies; materials; industrials; and health care. The largest earnings acceleration is expected from technology, with projected growth in the sector of more than 16%.
7. Don't limit your research. Depending strictly on fundamentals, technicals, sentiment or economics will limit your success. These must be combined to enhance your performance. Sometimes one won't give good signals while the others do. Make sure price and volume movements confirm your analysis, and use protective stops on all your trades. Remember, your goal is to participate in prevailing market trends.
I wish all my readers a safe and prosperous new year. We will pick up where we left off next week.
Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances
does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.
