by Gordon Pape in the Internet Wealth Builder
Stock markets rallied on Friday the 13th, but there may still be trouble ahead
I must say that I breathed a big sigh of relief at the close of the Oct. 13, trading sessions. The omens at the start of the day certainly werent promising. All the major indices had been battered on Thursday, amid escalating concerns about Middle East tensions, energy prices, inflation and profit warnings. Investors appeared to be skittish, and with cause. Worst of all, it was Friday the 13th, it was October, and there was a full moon in the sky. Could there be a more potentially destructive confluence?
Well, so much for omens, the casting of bones, superstitions and all the rest. If the powerful Friday rally can be believed, investors do not think we are slumping into a bear market. Rather, they are adopting the view of my favourite stock broker: The markets having a sale. Like The Bay on a Saturday afternoon, the aisles were crammed with people snapping up perceived bargains at 15% to 25% off.
Whether those purchases will still look like bargains in a couple of weeks remains to be seen. But there is no doubt that Fridays activity lifted a big load from the backs of concerned market-watchers and sent them into the weekend with hope that perhaps the worst was over.
Whether it truly is over will depend at least in part on the next round in the Middle East. We have a Monday summit meeting scheduled in Egypt, which will be closely watched. If the result is to pull the Palestinians off the streets and reduce the level of the Israeli response, that will be a major step to reducing some of the stock markets uncertainty.
Of course, the events overseas arent the only problem. Profit warnings from a string of companies including Intel, Apple, Dell and Lucent have sent the high-tech sector reeling. Inflation still sniffs menacingly at the door, threatening another round of interest rate hikes. October is only half over. So we arent out of the woods yet, not by a long shot.
Still, the Friday rally says that the current crop of investors remains optimistic about the future - why else would you buy so vigorously in the face of all this uncertainty? Apparently, its going to take a lot more than what weve seen so far to send them whimpering to the sidelines, tails between their legs.
In the last IWB, dated Oct. 2, I wrote the following: The wise investor will ponder all this, review his or her portfolio, and make adjustments where appropriate. Its time to adopt a more defensive mode, at least for the next few months. That does not mean sell everything - indeed, there are situations in which you should be strategically buying. It does mean taking some profits, shifting some assets into lower-risk securities, and positioning yourself for what could be an uncomfortable few months ahead.
I repeat that advice again now. It doesnt mean to rush out and sell everything. It means to look carefully at what you have and assess your own comfort level. This is not a time for big risks. It is a time for prudence.
Adapted from the Oct. 16 edition of the Internet Wealth Builder, a weekly e-mail newsletter edited by Gordon Pape. For details on how to become a member, click here.