U, V, W, or L?

What do the letters U,V,W, & L mean to you?  Probably nothing.  But, they are constantly talked about in the media because this is how economic recoveries are described.  These are how analysts describe the shape of the recovery.  Many believe it’ll look like an “L”.  That’s to say we were plummeting facing Armageddon and now that it’s over, we’ll just go sideways for several quarters and possibly years.  Some (few) say it will look like a “V”.  We were falling off a cliff and just like that we’re headed back up.  Everything is hunky dory.  I think it will look like some shape that’s not a letter.  We’ll have a recovery and eventually that recovery will stall.  Maybe the shape should be a backwards check mark that eventually goes sideways.  Is that some hieroglyphics letter?

We can debate how the economy will look like for days and days and I could write about it for days and days.  But, I’m not going to.  I know you care about how to make money whatever letter it resembles.  That’s my goal also.  So, let’s look at the stock market.

The first half of 2009 looked like a “V”.  The Dow Jones started the year around 8750.  We fell all the way to around 6500 and finished around  8500.  That’s a lot of fear and pain to go nowhere.  If you traded around in the first half of the year, then hopefully you severely outperformed the market.  But, the buy and hold crowd is flat.  What the economic recovery looks like is debatable.  But, the stock market price action was shaped like a “V”.  That we know.  So, what will the 2nd half of the year look like?  I think it’ll look very similar to the first half of the year, not in magnitude, but in shape.  I think we’re setting up for a sell off that could put the rally in jeopardy and have the doubters pile on.  Then, I think that sell off will be an excellent buying opportunity.  It could be a choppy rough summer but I believe we’ll have a pretty nice fall rally.  That’s how it’s shaping up right now.

Many people ask me how far down this market could go and that’s a really tough question to answer and one I don’t think we need to know the answer to.  When you start setting targets, etc., you may get distracted and end up losing money.  What I do is monitor what the prices of stocks are doing vs. the risk of owning those stocks.  And right now, the risks are very high for multiple reasons.  First, the technicals have been deteriorating and really look awful.  Secondly, earnings season is coming up and we just don’t know how investors are going to react to those earnings.  So, whether or not the market retraces 1/3 or 1/2, I know the risks are rising to own stocks.  If the market moves up and the risk falls at the same time, then it’ll be safe to re-enter, even at higher prices.  Unless you’re a quick trader though, I’d be patient and keep my powder dry.

This post published at www.karleggerss.com

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