Where Are Stocks Heading In 2007
In our view and in a word nowhere. Although the speculative risk may well be on the downside.
We feel that 2007 will offer little long term joy for either bulls or bears. Perhaps the only thing the market will do is frustrate participants. If we're right, the best strategy to trade the stockmarket will be to bet against prices at their extremes. So when prices have enjoyed a nice run to the upside and everything looks great that's the time to either sell to take profits or if you're an aggressive trader look to go short. And conversely, when prices have been hit hard and the majority of the pundits are saying lower is almost a certainty that will be the time to be brave, stand up and buy the market.
The Bull Market Is Still On So Says The XBD
A Year ago we introduced the American Broker/deal index (XBD) as being the only indicator needed to forecast the current bull market. Basically, as long as that index remains in an upward trend the overall stockmarket has little if any reason to sell off - Read the original article here.
The broker/dealer index is a stockmarket index made up of the big financial companies which have profited so much over the last 4 years because the bull market has been built by finance related productivity and profits. So as long as those firms can continue milking the cow the foundations of the bull market remain strong.
Back in the summer of 2006 when the market was looking decidedly suspect the XBD's held up and the long term trend never turned down. This is why we were confident throughout the whole summer madness to remain long of stocks and even advise readers of this newsletter to selectively buy.
The XBD will again be the main focus of our attention in 2007 and right now as the chart above shows it's just gone to new highs for the 4 year bull move. Therefore anyone who calls a top in the market is relying on luck far more than judgement to prove themselves right.
Is It worthwhile To Take Profits?
We believe that a sound strategy for long term holders of stocks would be to selectively start taking profits by selling into strength. Interest rates on cash balances of 5.45% (see this article on InvestorProfit.com for more details) are relatively attractive although it was announced today that inflation has hit an 11 year high (CPI is 2.7%). But there's no doubt that debt levels are still a massive worry for the UK economy and this combined with higher interest rates might force some asset prices lower. Hence, those with cash holdings might find themselves in an enviable position at some stage during the year.
What will It Take To Turn The FTSE 100 Trend Lower
Interestingly the sharp sell off during the summer of 2006 and the subsequent rally back to all time highs right at the beginning of 2007 has created a nice low on the FTSE 100 chart which can now be the focus for any potential trend change lower.
- Basically the level of 5985 on the FTSE 100 is now absolutely critical and must be held if the bull market is to remain
- But a move lower through 5985 itself won't turn the trend down according to how we read the market because the time factor always has to respected
- Any market can move one way or the other but in order to stay strong or weak there actually has to be some momentum which can always be measured by time
- So if the FTSE starts moving down and breaks the 5985 level that in itself won't be enough to turn the long term trend down, a trend incidentally which has been in force since 2003
- What would turn it down is if prices stay lower than 5985 for around 18 days because that would indicate real selling pressure
Yes, this kind of trend following is very long term and therefore the trend directions are hard to turn but following this kind of strategy is a good and low maintenance way to stay on the right side of a big bull market. We've also been using exactly the same chart reading strategies for investing in the Gold market.
To Sum Up
- If the FTSE 100 trend is to turn lower
- The market has to break down below 5985, and
- Trade below that level for 18 days or more
- The time factor (18 days) will indicate if there is really selling pressure in the market rather than just a natural short term retracement in a bull market
PS. One Tip - High Yielding Quality Stocks
If we were forced to give just the one stockmarket tip for 2007 it would be to go for high yielding brand name equities operating in strongly developed sectors. We wouldn't be surprised if the stockmarket holds up or advances that these kinds of stocks are the best performers in 2007, and don't forget they most probably carry the smallest risk as well.
- Lloyds Bank (LLOY) would be an example of such a stock (dividend yield around 6%)
- Also interesting to note that for the last several years it's been the worse performing bank share in the sector
- As cycles are always at play with stocks (and overall markets) turn-around investors would make a case that the company has plenty of 'catch up potential'
