Is it a good time to buy equities? It very well may be. Think of it: The broader indexes have continued their rally since October 2004, the price of crude oil has dropped from the $50s to the mid-$40s, and the Index of Leading Economic Indicators rose in November. All these factors suggest that economic growth could very well be on the horizon. But perhaps we shouldn't get too optimistic. The big question on everyone's minds right now is the deficit, which is expected to widen from 5% to 6% of Gross Domestic Product (GDP) to as much as 8% in 2008 and possibly even higher by 2010.
The saving grace may just be the falling value of the US dollar. A drop in the value of the US dollar would make foreign imports expensive, leading to more inflationary pressure. There is a high probability that the Federal Reserve will raise interest rates further in 2005. This could make US bonds attractive to investors, but higher interest rates also means borrowing will become more expensive. This would lead to a decline in investments and consumption. If this indeed happened, it would mean a grim picture for the economy. But clearly, the markets are not reflecting such a scenario.
There has been a change in mood in the financial markets, especially post- election. Previously, there was no telling which way the markets were going. More traders were making money by shorting positions and exiting before the close. Things are different now. There is more optimism in the market, and as far as equity markets are concerned, you could benefit by holding your positions overnight. The markets are not as erratic as they were in the first three quarters of 2004. Thus, it may be worth your while to incorporate position trading into your trading activity.
In this issue of Technical Analysis of Stocks & Commodities, we covered strategies that you can apply to markets showing short-term trends. Jim Berg's article, "The Truth About Volatility" (starting on page 14), discusses a system that lets you identify your entries and exits as well as where to place your stops. Barbara Star's article, "Directional Breakout Indicator" (page 44), shows how you can take advantage of profitable trading opportunities by identifying price breakouts. We also had the opportunity to speak with Rick Ackerman of Rick's Picks, who talks about some of the conditions he looks for to identify swing points. The interview starts on page 68.
Finally, as you'll see from my column in "At The Close," I need to make some changes in my trading strategies. I'm thinking that moving to position trading (for a while) may be a good idea.
Jayanthi Gopalakrishnan,
Editor
Originally published in the February 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.
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