Although the Dow hit the vaunted 10,000 mark yesterday, skeptics are still talking about a pullback sometime in the near future. Meanwhile, exchange traded funds (ETFs) continue to make gains. Which side of the fence are you on?
No, the economy is not completely out of the woods. Jobs are still being lost and consumers need to be coaxed with deep discounts to part with their money. That said, there are compelling reasons to be optimistic about the direction in which we’re headed.
Jeff Westmont for The Street has some points about why substantial gains could still be made from this current rally:
- Third- and fourth-quarter earnings could largely beat expectations. Companies are proving they can operate at lower revenue levels despite cost-cutting.
- So far in the third quarter, 80% of companies that have already reported have met or exceeded expectations.
- Retail sales over the last few months have demonstrated a slow, steady improvement. So has the performance of many industrial and technology companies.
- Consumer debt levels are down off their 2007 highs and consumer net worth is 30% higher than it was in 2002.
- Lower interest rates, food prices and commodity prices have all supported disposable income. Housing affordability is up and inventories are below 2006 levels.
- Nearly 50% of the revenue of the S&P 500 companies is international. Since the rest of the world will probably grow faster than the United States, the companies should benefit even if our own economy stays sluggish.
- Historically, unemployment peaks 12-14 months after the stock market bottoms.
Despite the positive signs, there’s a lot of pessimism out there. But those who have stayed out of the rally while fearing a correction have not only been left disappointed, but they’ve missed out on gains. ETFs that track major benchmarks are 10%-14% above their 200-day moving averages, while global benchmarks are nearly 25% above. (How emotions can hurt you).
To have the confidence to buy this rally, consider entering the markets with a strategy in which you’re protected on the downside.
By having an exit strategy and an entry position, you can wade into the markets with a cool-headed logic. By implementing a stop loss, you’ll give yourself a clear-cut signal on which to act when the uptrend reverses itself and either protect any gains you may have made or put a cap on your losses. Having an escape hatch ready can give you the confidence you need to move forward.
For more insight into trend following and how to implement a strategy, check out The ETF Trend Following Playbook.
No rally is guaranteed, but there are lots of reasons to be positive right now. Want 10 more reasons? We’ve got a long way to go and it’s important for investors to be ready to act, either way.
For more stories about trend following, visit our trend following category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.