Sunday, October 08, 2006

Weekly Look Ahead

Nobody likes to miss a party. That's why traders talk about "breaking through resistance" and usually predict a continued climb after new records are set. That happened dramatically last week when the Dow Index broke through all time highs and then showed continued strengths as more investors piled in, eager to join the party.

Anytime the market gets really enthusiastic, though, it can pay to settle down and scrutinize what is really going on. (If you want to continue the party metaphor, perhaps we can refer to this as "checking the punch supply.")

In last weeks look ahead I pointed out that the standard market cycle was getting all mixed up this time around. Weakness in the commodities sector normally doesn't come until well into a bear market and the early coming of commodities weakness could portend a far fiercer correction than before. It also pays to note that while people are celebrating a new market top five years have passed since that previous record, so we are still far short of a record if you account for inflation.

So what does one do? Well, I removed NOK from the active BUY list and bought some long term puts on that stock for insurance, despite the continued nice qualities of that company for the long term. This is the first thing you can do: become more cautious about the high prices of the market and possibly insure yourself with options.

Another important tactic when the market gets frothy is to review your strong stocks and see if they are getting ahead of themselves. Apple Computer [AAPL] is up 30% since I recommended it. When I recommended it at $57 it was clearly cheap. At its current value of $74 it is worth re-evaluating. Right now I still calculate a present value around $81, but if it gets near there I would probably start unloading that position and looking for more under-appreciated stocks. As great as Apple is, you always want to sell while the stock is still hot -- before the magic wears off! This is the second thing to do, scrutinize your positions.

So keep an eye on your portfolio for stocks you might want to insure and others that might have stretched their legs as far as they will go. In the meantime enjoy the rise and watch the news to keep aware of things like the commodities inversion that alter the investing landscape. I will continue to analyze such things here and keep us all ahead of the market. Coments are welcome.

Invest Well, FW


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