DOW 20,000: What You Are Not Being Told...
Global markets are hitting new highs.
The press is clamoring for Dow 20,000… even 21,000.
There’s this incredible wave of euphoria that we’ve seen since Trump was elected. The US dollar has been skyrocketing. Companies are announcing they’re bringing jobs back to the States. Financial stocks are running on speculation of lax laws.
And we’re witnessing what may be the biggest post-election rally in history.
The Dow, the NASDAQ, the S&P 500 – even European markets – are rocketing.
But do the markets deserve such valuations? Are we being set up for a crash?
Perhaps… but the euphoria can’t last forever.
In fact, some analysts point to the cyclically adjusted P/E (CAPE) – a valuation metric created by Robert Shiller.
According to reports, CAPE is now at 27.
The last three times it was a high – or exceeded – was in 1929, 2000 and 2008. And we know how well that turned out.
We have to remember that there are no fundamentals that support this rally, Dow 20,000, or even Dow 21,000.
History tells us there is no logical way stocks can remain at these elevated levels.
But traders don’t want to hear that.
And unfortunately, portfolio-killing emotion is driving the speculation-fueled rally.
Every one is buying because every one else is.
But no one is paying much attention to the iceberg dead ahead.
We have to remember that after the Dow ran nearly 330% higher from October 1923 to the crash of October 1929, a great deal of it was mired in heavy speculation and borrowed money. Much like we’re seeing now.
Also during the 1920s, the Dow hit 27 highs in eight years.
But it couldn’t be sustained because the fundamentals weren’t there.
Even now, after nearly eight years and 28 record highs, we’re running into the same issue. There’s no support.
Also, in 1929, a great deal of investors piled billions into the markets. Prices kept soaring, creating this artificial, unsustainable rally. Today, markets are fueled by the same speculative behavior, creating another unsustainable bubble.
In fact, tell me. After looking at this chart, does it look sustainable to you?
So how do you trade this? How do you protect YOUR money when it falls apart?
The best thing to have is strong money management for one.
With stocks, it’s always safe to use a stop loss of -25%, on average, for example.
Not only does the stop loss protect you in case a trade moves in the wrong direction, but it also removes the emotion from the trade.
We can also employ trailing stop losses, as well.
What’s nice about a trailing stop is that it will adjust higher as the price of an asset rises, thus allowing the investor to lock in gains.
For example, if a long position were bought at $10 with an initial 25% stop-loss set at $7.50, the trailing-stop would rise if the price of the asset continued to rise above $10.
Say you bought stock ABC at $6 a share.
As it pushed toward $9.00 a share just weeks later, you begin to get a bit nervous that the run is coming to a near-term end...
To protect your gains should the bottom begin to fall out, you can use a 10% trailing stop-loss. In this case, you'd set your trailing stop-loss at $8.10.
Or, ($9 x 10% = 90 cents; $9 – 90 cents = $8.10).
This way, should the run end, you still lock in a solid gain of 35%.
If the stock continues to head north, nothing happens. However, if the stock turns south and hits that trailing stop-loss, the stock is sold — and you pocket the profit.
Protect YOUR money because it’s no longer a question of “if” but “when” with the downturn.