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The Dow Jones Industrial Average last week dipped below 10,000 for the first time since February as a month of market volatility and price declines continued. Analysts predicted volatility to continue into June as government exit strategies begin and liquidity dwindles.
The zooming rebound in U.S. stock prices from their March 9, 2009 bottom – the strongest rebound since the Great Depression – has been stymied by concerns over the Eurozone debt contagion, financial reform, the market flash crash and new political sparks in Korea. Figures show that the bulls are still hanging around – on the sidelines – but the bears have been calling the shots during a month that has seen stock prices fall more than 8%.
"I think it's a question of pick your poison," Dan Alpert, managing partner at Westwood Capital, told MarketWatch. "The market was poised for a very severe correction and whether it's southern Mediterranean countries or worries about German banks, you can pick your catalyst."
Stocks in Portugal, Italy and Ireland were down 20% from April highs, joining the bear markets of Spain and Greece. Last weekend's announcement that Spain's central bank would take over savings bank CajaSur contributed to uncertainty about the Eurozone's ability to bailout Greece while other countries struggle.
"In another environment it wouldn't have changed anything, but in this environment it is a reminder about problems of the financial sector and of Europe," said Lars Christensen, chief analyst at Danske Bank in Copenhagen.
The market's "fear gauge," the Chicago Board Options Exchange's volatility index (VIX), was down to 15.58 on April 12, but hit an intraday high of 43.74 on Tuesday.
May's market activity prompted last week's installment of Money Morning Question of the Week: How are you responding to the market volatility? Have you retreated to safer investments? Are you scooping up the "bargain" stocks that others have dumped? Going forward, are you more likely, or less likely, to buy stocks? What concerns or excites you about the market's recent roller-coaster ride?
Here are some responses outlining readers' investment strategies and market predictions.
Prepping For the Storm
There's a storm coming, folks! I don't know just when it will arrive, but I am trying to get ready. There are a couple of stocks that I limit buy orders on, but more that I have with limit sell orders, as I expect a bounce in prices for a few weeks yet. There are lots of folks running around and screaming, "Crash! Crash!" so I expect things to improve for a while, to give them time to settle down. Then, "Crack!" one too many straws is going to land on that camel's back, and the market's going to inject some honesty into some places that haven't seen it for a while, and where it's going to be mighty unwelcome.
So how am I preparing? I'm going mostly to cash, except that I will be adding to some short and ultra short exchange-traded funds (ETFs), primarily financials and real estate, although only with a third, maximum, of my account. If I'm right, this will be enough to give my account a big boost, and if I'm wrong – or at least somewhat early – I need to be able to ride out the storm. And I am preparing a list of stocks that I really do want to own, although at a lower price. One thing I learned when the bottom dropped out a couple of years ago: Market crashes are not nearly as scary if you have cash in your account and a list of stocks that have great fundamentals but that have been driven to insanely low levels by panicked sellers.
I'm also picking up some gold and silver bullion coins, because sooner or later I expect to see inflation come crashing in. But I am mostly avoiding mining stocks for now, because even if gold and silver go up, mining stocks will likely get caught in the downdraft.
And I am prepared for the certainty that I'm going to make some mistakes along the way. I'll be too late making some moves, and too early making others, and I will miss some entirely, and I'm not going to worry about it. Life is played out in real time, and might-have-beens, and all the "woulda, coulda, shouldas" just distract us from doing what we need to do each day. I really see this upcoming storm as a once in a lifetime opportunity. With normal markets you are doing well if you make 7%-10% per year above inflation, but with the volatility that is now entering the market, we have a chance to do much better, but only if we keep our heads and are prepared to act instead of react.
And finally, I sent in the papers to convert the second of my three IRAs to a Roth IRA this week. I still have one to go, and as soon as the sale of my house goes through, I will convert it as well. The upfront tax bite is a pain, but the benefits down the road are tremendous. Yes, I know that the government makes the rules, and could change the tax-sheltered status of the Roth IRAs, but I still think my odds are better than without making the conversion.
– Gordon F.
Trust is Gone
I will never, ever place one penny into the securities industry again!
I have been an investor for over 40 years. When the October 19, 1987 crash occurred it signaled to me that the free market no longer existed and that Wall Street and the elite controlled the financial markets and world economy. I will fund no person or entity to make a financial decision or pay for information. This game is rigged and even if a profit is made the value on a time-weighted basis is behind the real inflation curve if, after taxes and expenses, there is not a yearly 20% gain.
I can purchase the needs and wants of life on sale at 20% or better; I can give to children for their direct and immediate benefit without cost, tax or inflation adjustments and benefit them or others in need.
The only place any fiat money will ever be transferred is into commodities that can be secured to my or family's hands; this excludes ETF's from this schematic. There are no funds in banks that pillage customer assets.
I have written a private investment newsletter for years and my readers have in many respects made the same decisions (aside for using electronic brokerage for natural resource stocks). We are all done making others wealthy for the risk involved in making small percentage returns.
All paper money represents debt instruments; all countries that have used paper without an underpinning of a valued commodity eventually self-destruct. Enough is far too much than enough.
"When the government fears the people there is freedom; when the people fear government there is tyranny." – Thomas Jefferson
– Not Submitted With Name
Time to Hedge
I have hedged my position in stocks by purchasing a bear market mutual fund. Specifically, the ProFunds Bear Inv (MUTF: BRPIX), which shorts the S&P 500 Index. It's not a perfect hedge, but close enough to prevent any great losses.
– Gene P.
Profiting From Volatility
Ipurchased a large position in iPath S&P 500 VIX Short Term F (NYSE: VXX) on May 4, suspecting that volatility was in the cards, and this play has been very good to me so far. I actually welcome the dips in the market now, since I have sold all but a handful of mostly defensive funds. I could be doing even better if I wanted to day trade, but I don't have the time or patience to do that.
– Susan P.
Stocking Up on Silver
I am buying as much silver as I possibly can. I only wish I would have done this decades ago. One of my patients is a very sophisticated portfolio manager. I am not one of his clients. He said that silver [will] drop to as low as $6-$7 before it'll take off as you have indicated. Regardless, I am buying junk silver here and there. I would really like to buy a few monster boxes!
What do you think of copper? Some folks are hoarding 1982 or earlier pennies with the thought that eventually – when the penny becomes extinct – it will be legal to melt them down into bars.
I would love to buy gold, but my cash flow is such that I feel that silver – in the long run – might serve me just as well or better.
As a doctor, I know a lot about a little. I am acutely aware of my lack of knowledge when it comes to the economical debacle and precious metals.
My IRA has essentially nothing in it. I no longer trust the banks at all. I don't even have a checking account!
No Room for the Little Guys
Thanks for the opportunity to spill a bit. I find I'm holding considerably more cash as of the last two weeks or so. I think of myself as an investor willing to do a little short/mid-term trading, mostly in options. I find it to be a rather nerve-wracking time, as the people I read and rely on are unable to identify this as a needed correction or a retrace into bear territory again. I'm willing to let things settle down a bit overall, but still carefully add to positions and dip my toe into companies I'm interested in. I'm using more stops than I normally do.
My largest concern is that the nature of the market has irrevocably shifted even more against the little guy, me as an example, due to quaint trading programs, the power of computer platforms and the flash phenomenon, and the giant institutional ebb and flow of cash and securities. It's so easy to get beat up out there and harder and harder to know why sometimes.
Gosh, am I whining?
– Jeff A.
[Editor's Note: Thanks to all who responded to last week's installment of the Question of the Week feature regarding market volatility. Be sure to answer next week's question: Do you feel better or worse about the U.S. housing market? Have you tried to sell or buy a home in the past year? Are you more or less likely to try and buy or sell a home today, and if so, what might you do differently today than you would have before the financial crisis started? Have you noticed any new or unique real-estate trends in your community?
Send your answers to firstname.lastname@example.org!
Is there a topic you want to see covered as a Question of the Week feature? Then let us know by e-mailing Money Morning at email@example.com. Make sure to reference "question of the week suggestion" in the subject line. We reserve the right to edit responses for length, grammar and clarity.
Thanks to everyone who took the time to participate – via e-mail or by posting their comments directly on the Money Morning Web site.]
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