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I think I’ll switch to Bonds!
In response to the recent turmoil in the financial markets a friend of mine said that she was considering switching out of stocks and into bonds. She asked me what I thought of this idea. Each week I think the market must be near a bottom yet it has continued to go lower. I almost dread turning on CNBC and I have found myself listening to it much less recently. Sometimes that is not a bad thing. Let’s take a look at the stock selling and bond buying idea.
First I try to try to keep the basic principle of buy low and sell high. This can be awfully difficult for something that seems so simple largely due to the fact that the exact tops and bottoms are impossible to predict but also the emotions of Fear and her good friend Greed usually creep into investing decisions. Given this it seems like it may not be the best time to sell stocks since there has clearly been a huge correction already 40% down as of last week’s end. It certainly looks to me like we are now nearer the bottom of the stock market than the top. This would violate the buy low and sell high principle. Additionally the last phase of the market correction is when individual investors finally sell. I don’t know about you but I never want to be the last to leave the party.
Earlier in the year I compared stock prices to shoes on sale and wondered if they would be marked down further on the clearance rack. Well not only have they been marked down further they have been shipped to the outlet mall. While the effects of reduced spending may affect profits of many companies for a while longer the stock market often prices in expected reduced profits and also recoveries ahead of time. This morning on CNBC there was reference to the bottom of the stock market being called at 7882 by a fellow named Hogan thereby calling it the Hogan bottom. A chart of the Dow Jones industrial Average on October 10 reveals there was a huge volume spike with a low of 7882. You can see this for yourself by opening a daily chart at BigCharts.com. (See my previous blog for details.) As I have said before exact bottoms are hard to pick but it sure seems possible if not probable that we are in the neighborhood.