As several of my last posts indicate I have whole heartedly adopted Dollar Cost Averaging as my investment strategy. The reasons have been discussed in length a few posts ago.
Today I thought about liquidating some of the investments I've made in the past 6 months due to the negative vibe in the market encouraged by leading economists and investment gurus such as Noriel Roubini, George Soros and Bill Gross who all attribute a certain bubbly taint in the markets.
Good thing I didn’t. I might, though, tomorrow.
The reason that kept me from selling today was my attempt at disciplined investing and self restraint. Still, my fear of a near drop in stock prices only grew today. The reasons for my fears are:
The low interest rate environment as a catalyst to bubbles – Low interest rate drives investors wild. Risk appetite is gradually growing seeking alternative means of generating returns slowly yet surely forgetting the risks involved. In a 0.25% interest rate environment an 8% return reflects a 7.75% (!) risk premium. We must not forget that.
Many stocks have regain past losses and some are close to 2007 levels than ever before – There is no sign the economic growth is stable enough for the long term to justify such a prices level.
The markets are running on the government expense fuel – Bank earnings and growth is generated mainly through increase government expense with no signs of private sector backing or growth. How long can governments keep this up?
Fear of stagflation is real – Stagflation, the situation in which both inflation and economic stagnation are present is more and more a reality with each passing day. Price levels are bound to rise eventually due the huge amount of money being dumped on the markets by the government. Eventually the weak dollar may get weaker while the economy hasn't regained in full (again, very dependent on government expense).
Technical analysis points to diminishing volume of trade in recent stock price increase – The trade volume does not support the trend. This is cause for concern from a technical analysis perspective. Just look at the trade volume today.
The markets rejoice as government aid continues. This is a risky game. Any market position, whether short or long is a risky wager. I'm seriously thinking of adapting my strategy for the short term. Tomorrow I plan on restarting my dollar cost averaging after realizing some of the gains I had made during the past 6 months.
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2 comments:
The problem in today's economy is the aid that the government keeps on giving banks which they only use to show as "profit". This is not profit at all.
If the government wants to help, they can do a lot of more helpful things such as rebuild industries so millions of jobs can be created.
I'm not convinced by the general view that stimulus is the only reason the market has gone up, personally.
Markets nearly always go up eventually after steep declines, and way ahead of economic fundamentals.
Agree stimulus may have moved it forward, but I think that was more about preventing downside risks than actually stimulating the upside.
(i.e. We avoided a depression, but now we're getting a normal recovery).
The big cost is going to be lower growth for years ahead as it's paid back, rather than a big new slump, I think.
(Of course markets can go up and down at any time for any reason, and this rally can't continue forever!)
Just my two cents. :)
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