Tuesday, November 11, 2008

The Bull Trap Snapped – What Now?

My spontaneous observations on recent events

About two weeks ago I wrote a post titled How to Recognize a Bull Trap. Since then the markets seem to have been struggling to hold on to any shred of optimism but I believe pessimism found its way back to the markets for now, as expected.

The high levels of volatility and edginess are still here. Manic depression still rules and as long as these remain there's no real reason to believe pessimism is letting go. Even now the S&P500 is clinging on for dear life barely holding the 900's. I'm not a chartist nor am I a big fan of technical analysis but certainly each level represents another psychological barrier for investors.

Although sound investing dictates avoiding trying to time the market I couldn't bring myself to start buying. I believe dollar cost averaging is a good strategy for these times but I can't bring myself to invest money in these markets. I admit I'm guilty of market timing sin. Human vanity I guess.

Another thought which constantly comes to my mind is that my recently acquired, still liquidated savings, serve as a healthy emergency fund for troubled times, should they present themselves. I know this behavior is very risk averse but I'm willing to pay the price in lost return on investment.

The Cup Half Full Part

I strongly believe in being the cup half full kind of person and accordingly I find there are actually quite a few good reasons to be optimistic about the markets and the economy:

  • Oil and commodity prices are hitting new lows with every passing day easing the aching economy and the toll on consumers.

  • Interest-rates are low worldwide and getting lower every day as fears of recession and deflation grow. Low interest rates encourage growth as the cost of money is relatively low compared to the alternatives.

  • As with all recessions and crisis the firms that withstand them emerge stronger and more competitive.

  • The Federal Reserve and central banks worldwide are responding with amazing speed and timing never seen before.

  • A new, yet unclear, breeze is blowing through the US government.

All we have to do is wither the storm. I am a big fan of determinism and I do believe the events we are witnessing simply have to happen and there's really no avoiding them. Every now and again a certain asset becomes overpriced while its risk is undervalued. Every now and again these problematic assets wrack havoc and cause financial institutions to run for the safety of liquidity thus crunching available credit. Stock market will crash; central banks will continue to bailout irresponsible CEO's and the wheel will continue turning… It's the circle of financial life.
Slowly but surely prices will be too tempting not to buy. I promise to post when I decide to jump back in. It'll be an interesting experiment for the personal financier.

Image by: Big Grey Mare


Dorothy Suter said...

There are always opportunities when the economy goes bust. Now's a good time to buy real estate, for example, if you have the cash for a down payment and still maintain good credit. You can buy an investment property, rent it and hold it until prices start coming back up. It's also a great time to start your own business. Even though business owners are tightening up, there are still opportunities if you focus on the vision and opportunity rather than the daily problems in the market and the ups and downs and who said whats...

Dorian Wales said...

I agree. In fact there are so many opportunities it's mind boggoling deciding what to go for...
Still, fear is in the air and I do feel like maintaining a solid emergency fund is wise...
I guess he who dares wins