How to Survive the Shock Market

How to Survive the “Shock Market”

Hi, Friends,

Nobody can deny that the last two weeks have been some kind of roller coaster ride in the “shock market,” the equity and bond markets of the world.

Last week’s plunge followed by this week’s rise proved to be a whiplash maker for all participants. And in the Internet age, these roller coaster rides are becoming more prevalent and ever more exciting. In February, we had the sell off caused by the drop in the Chinese market, and last week was the interest rate debacle in the bond market followed by this week’s recovery.

As investors, it becomes more important than ever to have a game plan for riding these waves that seem to be coming at us every four months or so. As I see it, here are the 3 keys to “shock market” success:

Don’t believe anything you read or hear in the financial press:

To me, the financial press should be taken as strictly entertainment. Here are a few quotes I read last week:

“Investors are throwing in the towel,” said Robert Auwaerter, head of fixed income investments at Vanguard.

“Such is the classic end to a bull market,” says Claran O’Hagen, head of strategy at SG Fixed Income.

“I expect 6.95 interest rates by year end due to more persistent inflationary pressures,” says Mervyn Kind, Governor of the Bank of England.

And here are a couple of quotes from this week:

"People are happy that core inflation came in better than expected," said Peter Cardillo, chief market economist at Avalon Partners. "It seems that the hike in food and energy prices was offset by the deterioration in the housing market."

"Core inflation is falling fast," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics

“Off to the races for the bulls! Wall Street records could fall Friday as traders cheer inflation gauge.” Marketwatch.com

So, what has changed since last week? Anyone making investment decisions based on what they read in the financial press is headed for disaster.

Have a clear understanding of your risk:

In markets like these, risk control is paramount. You need to understand what you have at risk and if you can sleep at night with that amount on the line. Also, a “buy and hold” approach will not let you control risk. Just ask the investors in the NASDAQ who are still underwater from the tech. wreck in 2000 or the S@P 500 Index holders who just now broke even after seven long years.

Dynamic allocation and clear stop loss points will allow you to control your risk because one day this market will turn, and with the global village of Internet investors with their fingers on the “Enter” key, the turn will be swift and painful.

Deploy a proven trading plan and be willing to stick with it:

Readers of this report know that we don’t believe in “buy and hold” and that it’s possible to outperform the market by investing in sectors that show stronger relative strength and sentiment than the broader market. The key thing for us as investors is to find a trading plan we’re comfortable with and then stick with it long enough for it to work. Human emotions are the biggest cause of investing failure and account for the fact that the average retail investor averages 3% returns per year compared to 8% for the broad markets. Put your emotions away and go with your plan, and you’ll be far more successful in the long run.

Next week promises to be more stable than the last two have been as the market adjusts to the news on interest rates and the “fog of war” clears. Our positions are intact and we’ll continue holding them but with tight stops to control our downside risk.

Have a great weekend.

Your partner in prosperity,

John Nyaradi
Publisher
Wall Street Sector Selector