Opening Position
October 2011
For some time, I have been saying that the markets are rallying for reasons unknown and to expect a turnaround in the markets any time. Is it finally here? But when I listen to the financial channels, many are suggesting that this is a temporary pullback and a good time to look for good buying opportunities. But I don’t buy that.
The wild gyrations in the markets during August 2011 caused quite a stir. One day, the markets would go down 4% to 5%, followed by an up day of about the same magnitude. And when there were three days of upside movements in a row, what we heard was, “See, I told you so!” Not so fast, because soon after that the markets would drop back to previous lows. Such unusual moves catch people’s attention, the media gets excited, and you hear differing opinions about what’s happening from just about every money manager, further adding to the confusion.
With the continuing problems in Europe, the raising of the debt ceiling in the US, and the S&P downgrade of the US credit rating, it is not surprising to see the markets get very emotional. Whenever something out of the ordinary happens, you can expect to see a lot of dynamism in the markets. And when that occurs, it’s the short-term traders who benefit the most from the turbulence.
Those who are not confined to the buy & hold approach will find plenty of short-term trading opportunities. If you are comfortable trading volatile markets, the moves we saw in August would have made you very happy. Short-term trading is a very stressful experience, one that is heavily driven by emotions. If you are not comfortable in such an environment, it is better to not participate in such markets.
That’s not to say that all our disposable income should be committed to short-term trading. We should all have some amount of our capital put away for the long term. The best thing we can do for the part of our portfolio that is reserved for the long term is to protect it from losses and keep it liquid. A market that is trading downward is not where you would be looking for long-term buys.
Global economic fundamentals are still weak and are likely to remain that way for a while. We will soon be entering the dreaded month of October, which is all the more reason to keep your focus on protecting your capital. Then, when the market does show some real upside momentum, you will be in a good position to think of long-term investments.
Jayanthi Gopalakrishnan, Editor