Friday, August 10, 2007

Stock Markets and Gold Stocks

S&P 500

For what it’s worth, I’m posting my opinion on the US stock market and the gold market. I am definitely not an investment advisor. I’ve studied the stock market for years and abandoned most methods of prediction because they didn’t work.

I soon adopted a “technical” approach rather than a “fundamental” approach, which means that I go by charts based on price and volume rather than by facts and figures about the economy or the companies traded on the exchanges.

First opinion: I think that gold mining stocks are, after a long, flat consolidation, getting ready for a big run upward. I’m not talking in terms of days, but of months.

Second opinion: The stock markets have jumped into the headlines because of a couple of large daily losses, and if there’s another big loss in the US today, the journalistic fervor will increase. But a few days of large losses doesn’t in itself mean anything. Based on the chart of the S&P 500 index, which ended yesterday at 1453.09, it looks as if a drop below about 1430 would mean a more prolonged decline for the U.S. stock market unless there’s an immediate bounce-back. A drop to the 1430 area on high volume with a strong rebound on the same day could, in fact, be a good sign for those who want the market to go up. But a real break below about 1430 would likely precede a significant further drop.

The public tends to think in terms of “bargains” when they read about sensational declines in stocks, but that is a shortsighted and simplistic view based only on recent prices rather than the bigger picture. If a market is in the process of peaking and experiencing sharp drops before a long decline (one can never be sure), an apparent bargain bought at that time will become a disaster.

The main result of all my research on the stock market over many years is that prediction of price movements for periods of months is very risky at best, and that the charts give valuable information about “where we are” rather than “where we are going.” But it’s a lot more helpful to have a map of where you are (e.g. in a deep valley or on a high mountain) than to rely on headlines about the most recent price movement. Perspective helps.

I’ll tell you the secret I learned after trying many ways of “investing” in stocks, sometimes with very little money which became even less money. It is that I made money with any consistency only when I began what is called “day trading.” In that term I now include, for myself, trading on price movements in a time frame of anything from an hour to several days. While it is impossible to know in advance where the market is going to be in a month or a year, technical analysis combined with nimble action on short price movements can produce more profits than losses if one obeys the cardinal rule of getting out quickly when things go against you. It may seem contrary to common sense to say that it’s safer to buy and sell in the extremely short term than to “buy and hold” long term, but it’s true. Caveat: You have to know what you’re doing!

I repeat. I am not an investment advisor, and I’m not suggesting that anyone act on anything I’ve written here. I must say that in order to keep from being fined by some regulatory agency!


Davo said...

hey, in the absence of any real reliability among th M oney market.

Hang onto gold . heh.

On the other hand .. How do you buy food with a bar of gold

Fleming said...

Davo, to answer your question: You have to buy a lot of food.

Seriously, I've never bought gold, but if I had the money now I'd buy stock in some established gold mining companies. Also, those who love to take our money in commissions have now devised "instruments" traded on stock markets which amount to the same thing as investing in gold; in effect you buy a small share in a big stockpile of gold and if the price of gold goes up, the price of your share will go up.

Thanks for commenting.

MarcLord said...

I've bought physical gold, not for speculation, but for preservation of value in the face of a steadily declining dollar value relative to international currencies.

Dollar devaluation is a fundamental trend which is not generally factored into market returns.