A News Driven Market

Posted on May 22nd, 2012

Monday’s bounce in the markets was a nice break from the past 7 weeks of declines, but what really caused it? The same things that’s been driving it down of course…the news. When current events headlines are moving markets, the media gets itself in the drivers seat vs. data. Yes data is news, but headline market movers are sometimes based on assumptions or “potential outcomes” vs. real tangible information. The moves are still real and investors are forced to deal with the consequences just the same, but its safe to say that emotions are getting the best of the trends.

Greece and/or Europe have been driving headlines and add to that the recent loss at JP Morgan and you find investors and institutions alike have decided to take profits from the great run of October 2011, through March 2012. Earnings have not been catastrophic (unless you’re in JCP), and government reported data like GDP or Unemployment has been relatively neutral. So why haven’t they caused stabilization? Again, it is emotional reaction to what may happen that is causing the sell-off. 

As we all know taking emotion out of the equation is important to a Buy and Hedge investor. It’s the only concept we actually dedicated two chapters to in our book. But even when you’re not emotional, you may be forced to deal with those that are. So what to do?

The answer is found in the Iron Rules. Know your risks and be sure to hedge. Stick to your strengths and harvest the gains and losses when you can. That’s it. The plan is designed to work in any market environment. Even the emotional ones. If you’ve kept up with your hedges and they are coming into the money, so be it. It’s a chance to add to positions while the market is down. If you’re a seller of options for income, keep selling and don’t try to time the prices.

In this kind of environment of fear and greed, expect volatility to stay on the high side as any notion or idea can send the sellers or buyers into a frenzy. Remember the old saying, “The market has the ability to stay irrational much longer than your ability to stay solvent”.  Just because a market reaction doesn’t make sense, doesn’t mean it can’t hurt you.  This will pass and if it doesn’t, you’re hedged so you should already know the worst-case scenario. In other words, no reason to get emotional.

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