Stocks & Equities
In last week’s missives, I discussed the potential for an oversold, short-covering bounce which was to be used to further rebalance portfolios and reduce equity risk. The target zone was 1940 to allow for the completion of the “risk reduction” process.
“That rally could take the markets back to the previous resistance of 1940 (about a 4% push) from current levels. Such a rally would be enough to suck many of the “bulls” back into the markets pushing markets back into overbought territory and setting up the next decline.”
The good news is that the market was able to break above 1940, and the 50-dma, which now clears the way for a push to the 1970-1990 where the next levels of resistance will be found.
The bad news is that the markets are once again extremely overbought and still confined inside of an overall downtrend.
Well, it’s clear to me. If you look at the world over the last 100 years, you have a group of people that want to have more and more control over you and me. They want to know where you are, what you do, what you’re looking at. Basically, we’re moving into an Orwellian society where they can check everything. And cash will still be one of the means where you could go somewhere and buy something and nobody would really know about it. Now they want to abolish it. Of course…
I opened my first bank account when I was 14 years old. I faithfully squirreled away money that I earned doing odd jobs like babysitting and mowing lawns, a few dollars at a time, with the hopes that it would grow large enough to fund the fancy cars, giant house and amazing vacations I planned to have when I got older. Then came college. I learned pretty quickly that it was far easier to spend money than it was to save money. Even living on ramen noodles and Diet Coke (the diet of college girls of my generation), I watched my bank account dwindle. I wasn’t alone. Figuring out how to balance financial assets with financial pressures turned out to be a challenge.
It’s even worse for millennials today. According to a report from Bank of America/USA TODAY, most millennials claim they weren’t on the receiving end of financial advice growing up. Nearly half (44%) of millennials claim their parents didn’t talk to them about how paying for college might affect their financial future. Nearly three-quarters of millennials say that they grew up without discussing good financial habits as children.
Despite their concerns, millennials do care about managing money and taking control of their finances. Nearly 6 in 10 claim to earn more than they spend (58 percent) while more than half set money aside for savings (56 percent). Still, many believe that it will be more difficult to benefit financially compared to their parents at this age with more than two in five (43 percent) intending to rely on their loved ones for financial help in retirement.
It’s clear that many millennials are wading through financial waters without much in the way of direction – just like I did. With all there is to consider when it comes to finances, wouldn’t it be great if there really was a cheat sheet? What if there was a list of what you absolutely needed to know about money written by folks who have already been forced to make those tough calls? I called in the experts – all part of our Investment Team at Forbes – to offer their absolutely “must know” tips.
In January of 2016, the Investment Team put together a series of primers – from taxes to employee benefits to life insurance and everything in between – the 100 Things You Absolutely Need To Know About Money Before You’re 35. We were blown away by the reception and honored to be asked by readers to put the pieces together in a compilation. We listened. Today, we’re proud to launch our e-book, which includes all 100 things in one easy reference.
You can order your copy from Amazon here.
And yes, our #100 Money Tips are geared towards millennials but that doesn’t mean it’s off limits to the rest of you. I’m guessing that nearly everyone can learn a few new tricks: I know I did.
Want more taxgirl goodness? Pick your poison: follow me on twitter, hang out on Facebook and Google, play on Pinterest or check out my YouTube channel. For cases and tax related docs, visit Scribd.
We get it… you’re worried.
The bad news is easy to repeat: The market celebrated the New Year by stumbling down 9% right out of the gate… the worst start to a year ever. And it’s still down 5% year-to-date…
It’s naturally concerning to get up every morning to see more red (negative) numbers on Yahoo Finance.
But if you only take away one message from today’s essay, we want you to understand… Nothing unusual is happening in the market.
Declines of this magnitude don’t signal the end of prosperity. They are normal market movements. If you hold high-quality, long-term investments in your retirement accounts… don’t worry. Building wealth comes from holding for the long term – including through market dips.
But what about options trading? What does the recent market volatility mean for the kind of short-term trades we open in my newsletter, Retirement Trader?
The good news: Right now is an ideal time to trade options the way we do… With this correction, we have a greater opportunity to profit.
Below, I’ll show you exactly what I’m talking about. We’ll take a close look at how the market really works. You’ll see that even though the news makes it sound like the world is ending, the market is behaving normally…
By our count, from 1950 to 2015, the market experienced 47 pullbacks of 5% or more, 40 “corrections” of 10% or more, and 11 “bear markets” of a 20% drawdown. (In the unofficial vocabulary of Wall Street, a “correction” is a 10% fall and a “bear market” is a 20% fall.)
The following chart tells the story:
This tells us a few things. First, the correction that we’re experiencing right now is normal. It happens about every 1.6 years (though not on a set schedule, of course).
Second, it’s extraordinarily difficult to “trade around” these normal market movements.
If the market fell 5% and you sold shares in a panic… you would have been wrong 73% of the time. In 107 out of 147 pullbacks, a 5% fall represents the bottom, and then the market rebounds… So you would have sold low, and the market would have recovered without you.
Say you’re a little more stouthearted and you wait until the market falls to 10% to sell. This would mean that you’re trying to avoid a bear market drop of 20% or more. Even then, you’d be wrong 72.5% of the time – only 11 out of 40 pullbacks of 10% or more turn into bear markets. And again, the market will rise without you.
Selling in a panic rarely pays off. Don’t do it.
As I’ve told you before, we don’t do fear. We do rationality and preparation. We don’t trade based on emotion.
That’s why we’ve added defensive plays to our Retirement Trader portfolio to prepare.
And as always, we only trade on stocks that we’d like to own.
Corrections like these are a part of the business. In fact, we dealt with one in August. Take a look…
As you can see, the market bounced back quickly.
That’s the norm. But we don’t know for sure if that’s what will happen in this correction. The market may decline some more. It may stay level for a while.
The important thing is, we know how to take advantage of what’s happening.
Remember… options prices are determined by volatility.
When volatility is high, options get more expensive. It’s built into the way options are priced. In a simple sense, you can think of those who BUY puts as people buying insurance contracts. Those people are willing to pay a lot more for insurance when they are scared.
For those who SELL puts, this is good. We’re like insurance sellers. We can earn more income on the exact same trades simply because people are willing to pay more out of fear.
The recent correction has boosted volatility and options prices, which means the trades we open during market corrections should generate higher returns than we would make by simply buying stocks.
We don’t expect you to enjoy corrections like this. They are stressful. It feels like the market is doomed to continue falling.
But that’s simply not true. Remember this, and you can profit.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig
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A STRONG START TO 2016 FOR THIS WORLD DOMINATOR
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