finance

Is it a Time for Caution in the Stock Market?

Posted on by Joseph M. Brennan Jr.

In examining the three year chart of the S&P 500 index (SPX) there appears to be potential changes in the behavior of the SPX over the past few months as indicated in Figure 1 below.

 

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Figure 1: Annotated SPX chart (SPX chart provided courtesy of stockcharts.com)

For about the first two and a half years of this three year chart the SPX was in a strong uptrend as indicated by the green line in Figure 1 above. This period of time was characterized by what I will refer to as “checkmark” shaped recoveries in which drops from previous highs were followed by higher highs (see blue checkmarks above the green uptrend line).

Since the Summer months of 2015, however, a different pattern appears to be emerging suggesting that the SPX might be in the beginning stages of a downtrend as indicated by the red line in Figure 1 above. I ponder whether the future might be characterized by “reverse checkmark” shaped recoveries in which drops from previous highs are followed by lower highs. We might already be seeing hints of this (see the two blue reverse checkmarks below the red downtrend line).

If the red downtrend line above is confirmed we could see a drop in the SPX of 10% or more from where it is today. Thus, we might be entering a period of time where we’ll start seeing the lower highs and lower lows which are characteristic of downtrends. As such, it might be wise to proceed cautiously and to manage your risk. I’ve written several articles on how to effectively manage risk (click on “Financial Planning, Management, and Investing Related Posts” on the sidebar to the right or below, depending upon which device you are using, for helpful tips on managing risk and how to become a solid investor overall).

Those who are interested can follow my stock market activities here.

You can also follow me on twitter if you like at Joseph M Brennan Jr @ Brighter Days Life Coaching.

Risk: How Much Should You Take When Investing Your Money?

Posted on by Joseph M. Brennan Jr.

Perhaps the most important consideration when making investment decisions involves risk. However, what many people fail to realize is that not only can it be detrimental to their financial future to take too much risk, but it can also be detrimental to their financial future to not take enough risk. Largely, due to the bursting of the dot com bubble in 2000 and the subsequent financial crisis of 2008, many of today’s investors associate risk with emotional comfort level and, as such, primarily rely on cash savings or conservative investments to empower their financial future. However, what many of these investors fail to realize is that it could take a lifetime (or longer) to reach their financial goals in this fashion. Thus, even though they might tell themselves that they are taking little or no risk at all via the financial decisions they are making today they are, in fact, taking substantial risks in terms of empowering their financial future.

So, just what is the right balance between taking too much risk and not taking enough risk? This is a question that I frequently work with people to determine when coaching them on how to manage risk over the life of their investments. I do this in several ways to include:

A. Determining the risk category for each investment goal whether it’s a down payment for a home, an education fund, down payments for investment properties, or a retirement fund. The two primary considerations for determining the appropriate risk categories are:

(1) The defined amount needed upon reaching the investment goal (i.e., how do you know when the goal has been met?). To remain relevant, this amount may need to be adjusted over time. For example, when first establishing a financial goal for a down payment on a home you might initially estimate that you need $20,000 for this down payment, but later, due to home price increases and the type, size, and location of the home that you then desire you might discover that you actually need $30,000.

(2) How much money you presently have, how much money you still need to reach your latest adjusted goal, and what your time horizon is for reaching this goal. If, for a given investment goal, an analysis is performed and the determination made that it falls into a high risk category then you will need to invest in higher risk investments in order to meet this financial goal within your desired time frame. Otherwise it will take longer to reach this goal. The good news about being in a high risk category is that you do not have to be very precise in terms of market timing and/or the investment selected to progress towards the financial goal. On the other hand, if, for a given investment goal, this analysis is performed and a determination made that it falls into a low risk category than you will need to invest in lower risk investments to better ensure that you will not lose a significant portion of what you presently have should the markets experience significant declines. Otherwise, you run the risk, again, that it will take longer to reach this goal. In other words, it doesn’t make sense to take a lot of risk when you do not have to if you can meet this financial goal without taking this additional risk. The bad news about being in a low risk category is that you have to be much more precise in terms of not buying at the wrong time, or not buying the wrong investments, in order to sufficiently progress towards the financial goal. Unfortunately, as stated previously, many of today’s investors associate risk with emotional comfort level and thus rely on cash savings or conservative investments to empower their financial future. Furthermore, many of them have not even taken the steps to define what each of their investment goals are. If they did, they might be surprised at how long it might take to reach these investment goals by relying on cash savings and conservative investments. For example, if you had a total of $10,000 today, save an additional $2,000 per year plus a 5% increase for each future year, and invest all of this in emotionally comfortable conservative investments earning 3% a year, and plan to retire when you have a million dollars then it would take you 67 years to reach this retirement goal. Sixty seven years! However, it’s actually much worse than that. If you estimate that you might need $1,000,000 in today’s dollars to retire how much would that need to be 67 years from now? Well, assuming an average inflation rate of 2% per year, then your investment goal would need to be $3,800,000 dollars. So, although many of today’s investors invest in emotionally, comfortable, conservative investments what they do not realize is that they may not be able to reach their financial goals in their entire lifetimes! So, defining and refining their investment goals and re-evaluating progress and time frames are essential to ensure the appropriate investment risks are being taken. An investment which is emotionally comfortable today may not result in the gains needed to realize the investment goals within the desired timeframes. Recently, I coached a woman who wanted to retire in five years time, but was investing all of her money in a conservative bond fund. After performing some analyses we determined that her current savings would have to grow ten fold in order to reach her investment goal. Using an above average return rate of 8% per year it would take about 28 years or so to reach this goal. If she wanted to retire much sooner than that then the only chance she’d have of making it would be via high risk investments. Please do not wait until you are five years from reaching a major financial goal without understanding the appropriate level of risk to take to ensure your success. You don’t want to be forced into a high risk investment with little time to recover should the markets not cooperate. Making these assessments early on, and making adjustments and managing risk all along the way, is critical and will accelerate your progress towards reaching each of your financial goals.

B. Track and perform risk-reward assessments across various investment alternatives and invest in those which are appropriate with respect to the risk category associated with each investment goal. I perform risk-reward assessments based on various indicators and financial data that I regularly review and evaluate. I’ve discussed some of these via some of my previous articles: Using Bollinger Bands, Stochastics, and Other Indicators to Guide Stock Market Activities and Using Technical Indicators and Charts to Guide Stock Market Activities and Using Price Averaging to Manage Risk.

C. Invest in a disciplined fashion in accordance with the risk category associated with each investment goal using investment strategies appropriate for the risk category. I work with people to develop investment strategies in this fashion. One of the many strategies that I use is averaging into the stock pricing when buying and averaging out of the stock pricing when selling which is something that I discussed in one of my previous articles: Using Technical Indicators and Charts to Guide Stock Market Activities and Using Price Averaging to Manage Risk.

So, effectively managing risk and finding the right balance between taking too much risk and not taking enough risk, all along the way, is critical for empowering your financial future. Do not rely on cash savings and conservative investments if it will take nearly a lifetime (or longer) to reach your financial goals. Likewise, if you have made substantial progress towards reaching your financial goals, do not take so much risk that you stand to lose a large percentage of this progress if the markets significantly decline. I can help you to determine the right balance between these two extremes. And achieving the correct balance is critical if you hope to have the money you need to reach each of your future financial goals.

Managing risk and maintaining the correct balance of risk is key to progressing towards your financial future and the freedom that it brings. The impact of not doing this smartly is the same either way. If you do not take enough risk you will not reach your financial goals within your desired timeframes and if you take too much risk you will not reach your financial goals within your desired timeframes. The optimal level of risk to take at any given time is fluid and dependent upon your specific financial goal, the progress to date, and the associated timeframe. Any change to any one of these aspects will influence the level of risk appropriate for meeting the specified or refined financial goal within the specified or refined timeframe. Sticking to the same plan independent of these considerations will threaten your financial future and the financial freedom that it brings. I can help you to achieve this balance every step of the way.

This article informs how to manage risk and how to find the right balance between taking too much risk and not taking enough risk for each of your investment goals. Part of being a successful investor, and realizing consistent gains over time, involves managing risk and finding the right balance between these two extremes in a fluid, disciplined fashion over time.

For those that did not know, I generally perform life coaching and training services in two primary areas: 1) Personal and Professional Improvement, Development, and Growth, and 2) Financial Planning, Management, and Investing. As such, I generally alternate the articles that I write via my blogs between these two topic areas. This particular article is associated with the second area that I life coach in. So if you don’t have much interest in financial planning, management, and investing, rest assured that the next article that I write will be in the area that you might have greater interest in; the personal and professional improvement, development, and growth area.

 

Joseph M. Brennan Jr.
CEO/Life Coach – Brighter Days Life Coaching
“Your Brighter Days Life Coach for Life”

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Using Bollinger Bands, Stochastics, and Other Indicators to Guide Stock Market Activities

Posted on by Joseph M. Brennan Jr.

Generally, I like to use a series of indicators to evaluate the risk-reward potential of various stocks and inform and guide actions that I take in the stock market. Two of these include Bollinger Bands and Stochastics. Today, in the stock market, I decided to sell some of my shares of Unisys (UIS) based on these and other indicators that I generally look at.

I initially bought the UIS stock a few months ago, because the risk-reward indicators that I generally look at appeared to be highly favorable at the time. The stock had a pretty good run prior to its earnings release on 23 July so I decided to sell half of my position then, because stocks sometimes move significantly on earnings release day, and in case the stock price declined, I wanted an opportunity to purchase the stock at a lower price. Sure enough the stock did fall significantly and my risk-reward assessment indicated the pricing of the stock became highly favorable. I then started aggressively buying as a result. I decided to sell some shares of this stock today for several reasons such as those indicated by the following chart.

Chart courtesy of StockCharts.com

Chart courtesy of StockCharts.com

My reasons for selling some of my UIS shares today included the following:

1) The stock was converging upon the upper Bollinger Band.

2) The Stochastics Chart was indicating overbought conditions since the Stochastics Line was above the 80 mark.

3) The UIS stock “reverted to the mean” (namely the 50 day EMA and had previously crossed the 20 MA which is represented by the dotted centerline between the upper and lower Bollinger Bands). I discuss this aspect in more detail in my article, Using Moving Averages and Dollar Cost Averaging to Realize Consistent Gains in the Stock Market.

4) The UIS stock has been “filling in the gap” between the 23 July gap down and the previous day’s close. Sometimes, I like to wait patiently for that to happen before selling a stock that I’m holding.

Each of these are indications that the UIS stock might be getting a little pricey and that it might be time to consider selling some shares to manage risk and have cash available to take advantage of future investment opportunities that become available when risk-reward indicators become highly favorable in nature.

The UIS stock still has the potential to continue increasing since the one year price target of $31.00 is about 34% higher than where the stock price stands today. As such, I decided to continue holding some of my shares. In addition, the fundamental data associated with the UIS stock is also favorable which often leads me to patiently hold stocks for longer periods of time than I otherwise might.

So… That’s where things stand for me in the stock market right now… I’ll let you know how things go… Either way I have a plan. If the UIS stock rises significantly, or the risk-reward becomes substantially more unfavorable in nature via the indicators that I look at, then I’ll be a seller of additional shares, but if the UIS stock falls significantly, and the risk-reward becomes favorable in nature via these indicators, then I’ll be a buyer.

Keep in mind, when performing your own investment activities, that evaluating the risk reward of investment alternatives using various indicators such as “Bollinger Bands” and “Stochastics”, and taking actions accordingly, can help you to manage risk and realize consistent gains in your investments over time. Part of being a disciplined investor, and realizing consistent gains over time, involves recognizing unfavorable conditions, taking actions accordingly, and patiently waiting until the next compelling investment opportunity arises; one where the risk-reward becomes favorable for you according to your risk profile. If you operate in this fashion you will experience much success as an investor.

Using Moving Averages and Price Averaging to Realize Consistent Gains in the Stock Market

Posted on by Joseph M. Brennan Jr.

Today, in the stock market, I decided to sell half of my shares of General Motors (GM) for a small gain. I initially bought this stock a few weeks ago, because the risk-reward indicators that I generally look at appeared to be highly favorable. However, the stock continued to fall so I decided to keep buying to price average into it. Often people are tempted to sell stocks that continue to fall, but I decided to continue buying and patiently wait at least until the stock reverted back to the mean before considering to sell the stock. The “price averaging” and “reversion to the mean” techniques are approaches that I’ve used repeatedly when experiencing initial losses to allow me to recover from these losses and manage risk. All stocks eventually revert back to their means so these techniques can be strategies you can use to improve gains, manage risk, and maintain a sense of patience and discipline when performing your investment activities. As you can see from the chart below the GM stock experienced some steady gains over the past several days and has reverted back to the 20 day Exponential Moving Average (EMA).

Chart courtesy of StockCharts.com

Chart courtesy of StockCharts.com

As such, I used this as an opportunity to sell some shares. Frequently, major moving averages such as the 20 day EMA serve as resistance zones and support zones to stocks. Since the GM stock has not yet sustained a move above the 20 day EMA I took it as another sign to sell at least part of my position. Stocks that do not sustain moves above resistance zones often decline. Selling half of my position will allow me to use the freed up cash to buy at a lower price should this decline happen and I decide to capitalize on it. On the other hand, the remaining half of the shares I own will allow me to capitalize should the stock sustain a move above the resistance zone which frequently results in significant price increases. So… That’s where things stand for me in the stock market right now… I’ll let you know how things go… Either way I have a plan. If the GM stock rises significantly, or the risk-reward becomes unfavorable in nature, then I’ll be a seller of additional shares, but if the GM stock falls significantly, and the risk-reward becomes more favorable in nature, then I’ll be a buyer. Keep in mind, when performing your own investment activities, that evaluating risk reward, taking actions accordingly, and using techniques such as “price averaging”, “reversion to the mean”, and “resistance and support zones” can help you to realize consistent gains in your investments over time.

Latest Stock Market Activity (18 Aug 2014)

Posted on by Joseph M. Brennan Jr.

So… Today, in the stock market, I decided to sell my remaining shares of the XIV ETN which I started selling last week (the XIV ETN essentially bets on a fall in volatility). It gained a little over 4% today and has gained a phenomenal gain of over 23% in the past seven days which is nearly a three and a half year gain on average. The stock still appears to have some room to run, but the indicators that I generally look at indicate that the risk-reward is becoming a bit unfavorable. So it probably made sense for me to go ahead and sell instead of taking additional risk for what might amount to be a marginal gain.

Part of being a disciplined investor, and realizing consistent gains over time, involves recognizing solid gains when you see them, taking actions to capitalize on them, and patiently waiting until the next compelling investment opportunity arises; one where the risk-reward becomes favorable for you according to your risk profile. If you operate in this fashion you will experience much success as an investor. And if you need any help with making any of these determinations, you know who to ask… Have a wonderful Monday everyone!

Latest Stock Market Activity (17 Aug 2014)

Posted on by Joseph M. Brennan Jr.

So… The strangest thing happened in the stock market Friday… I was getting ready to sell my remaining shares of the XIV ETN which had gained nearly another 2.5% (for an overall gain of about 16% over a period of a couple of weeks – well over a two year gain on average). Well, as soon as I was getting ready to sell the stock rapidly dropped. It lost about 5% in a matter of minutes! So I then decided to pursue the other side of the trade; being a buyer instead of a seller. A number of times when a stock drops rapidly it falls to such extreme levels due to the fear it generates that it bounces significantly. So I decided to put in a purchase order at a ridiculously low price, because you never know… You might just get it. And if I didn’t I could always monitor the situation and adjust my price upwards if I so desired. Well, as luck would have it, the price dropped another 5% down to the price I had made the purchase order for and I bought the shares. By the end of the day the shares rebounded and I sold them for a 6% gain which is nearly a one year gain on average in a matter of hours! No, I was not going to turn down a gift like that! In the world of investing it is not very often that you can time something as beautifully as this. So I decided to take the cash and run. I will now wait patiently for the next compelling “buy” opportunity to put this cash to work.

This is one example of why it’s good to not always be fully invested so that you have cash available to be able to capitalize on opportunities such as this. You never know when these opportunities might arise so you always want to be prepared by periodically raising cash; rotating out of investments which become less favorable such that you can take advantage of investment opportunities which become favorable over time. You won’t make winning investments all of the time, but the point is to use strategies and techniques which allow you to make winning investments for much of the time.

So… That’s where things stand for me in the stock market right now… Have a wonderful Sunday everyone!