MHP Asset

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Trade With the Pros

January 1, 2007

Last month I wrote an article about momentum markets, which we have been in for some time. Momentum markets are when traders and investors buy stocks on pullbacks or dips in the markets that are usually caused by negative economic news or the threat of higher interest rates. This buying then propels the market higher and higher, until something significant pushes the market into a reverse momentum state or what I believe we are in now, a neutral or a two sided market.

The significant pullback from a couple of Tuesdays ago placed our markets along with global markets into a market that professional traders love to trade, a market that you can go long (buy) or short (sell). Most market bulls (believes market is going up) welcomed a correction in the markets, because they were overbought or extended. Typically new money can not find its way in to overbought markets which is not good for anyone.

Many people view this pullback as a buying opportunity, but I would caution you that this correction is probably not over. Take a lesson from traders and investors who kept buying the dips in 2000. The stock market kept dipping and people lost a lot of money.

This is a good time to not be complacent and make necessary adjustments to your portfolio to weather what could be a minor correction or a global bear market.

Yes I said it, a global bear market. It is too early to tell if it will be that severe or not, however the smart money (professional traders) will always hedge their positions. What I mean by that statement is; professional traders and money managers will not attempt to pick bottoms to a market in a correction phase, but they will attempt to lessen the effects on their portfolios through hedging the portfolio, which I covered in my last article titled ‘protecting profits’.

Investment portfolios are made up of assets which are considered capital. The capital can be stocks, bonds, mutual funds, real estate or a host of other assets. Another type of capital is mental capital. If this global stock market turns into a global bear market, and your portfolio is not properly hedged and diversified, it will begin to negatively impact your mental capital. This may sound a bit extreme to you, but most of us can remember 2001-2002, when investors did not want to open their brokerage statements because they could not face the bad news.

One of many lessons that I have learned as a market technician and trader is, never say never. Another lesson is that everything is cyclical, and the time in this cycle would indicate a further pullback in the global equity markets.

Professional traders and money managers hope that the retail investor remains passive and does nothing to hedge their portfolio. That is where the professional traders make their money and the retail investor losses money.

Lately I have received a lot of positive feedback about the articles, and some feedback which tells me that some of the things I mention are technical, and not familiar to some readers. For this I apologize and invite you to call or email me with your questions.