What the Stock Market Is Telling Us – Market Indicators

By Michael Lombardi
Profit Confidential Writer

All eyes are following the world central bank activity as the investors speculate on where to put their money in the stock market. The month of August 2012 stared at a dismal jobs report; with the Labor Department reporting an addition of only 96,000 jobs, as against the predicted number of 125,000. The unemployment rate registered a fall because 368,000 Americans dropped out of the labor force. The number of temporary helpers too has reduced by 4,900 in that month. Naturally, this reflects a situation of a slowing economic phase. In addition, hiring was also deeply affected, as many employers cut down deeply on the same.

The manufacturing sector had to chop down about 15,000 jobs. It is estimated that normally, the consumer spending contributes to nearly two thirds of the economic growth. Even this sphere has dwindled down considerably. All the above has cumulatively resulted in more and more people opining that quantitative easing in the form of monetary stimulus by the Federal Reserve will be done by the world central bankers before the end of the year and as investing in stocks is most profitable when the stock market speaks of high volatility, currently they are presuming that investments in stocks will be safer. But they could be wrong in their stock analysis, couldn’t they? After all, this is a very unpredictable field!

The market has already gone through so many rounds of monetary stimulus and effectively, we have not seen any good results due to the same; so let us now pause to consider what could happen when an additional quantity of the same is generated through the above-mentioned quantitative easing. If there is a general sentiment that a certain stock is bound to do well, most investors will tend to put their money into that stock. But in all possibility, the price may fall, because, after all, it really depends upon how much it has risen already to drive it up further high; a very good example of “Buy the rumor, sell the fact” saying. Again, as previous rounds of quantitative easing have given no more that disappointments and a sense of false hopes, there may be no positive reaction forthcoming in the stock markets. In such a case, there is every fear that the state of the world economy will deteriorate further. Investors need to protect their capital investments if the stock market breaks below key technical levels. As a rule, they ought to practice patience and only think about buying shares when the stock analysis is indicative of their unreasonably cheap prices.

Just a few days ago, the European Central Bank had announced that a program of a new bond-building would be introduced in an effort to deal with the Euro Zone debt crisis. Consequently, all the three major indexes had rallied and stocks were all set to improve their profits, but then the reports of depressing job figures put obstacles along their paths.

There are many blue-chip, dividend paying companies that still do manage to hold up, despite the sorry state of affairs of the economy. So also, do a few large cap companies. So, one must think about good investment strategies along with management of the probable risk factors. It is also essential to preserve the capital amount. Only then will the trading be good.

A dependable policy would be to devise a probable exit strategy with the higher trending of the stock price. One can ensure that the profits will thus remain protected. After the stock price rises, take some profits; in all likelihood, the price will fall down again. The present stock market is on the third leg of a repeating pattern that began about three years ago. Its decline that began in 2008 reached a low in March 2009 after which it recovered sufficiently. The share prices looked much better in July 2009 and kept up a rising trend till April 2010. This pattern repeated itself the next year and most likely will be repeated for the third time.

Later in the week, Federal Open Market Committee (FOMC) meeting will take place; the discussions of which many an investor will very much be interested in. Over the next couple of years, we may be witness to higher price inflation and yet another recession in the U.S. Hence it is not necessary that the investors already owning dividend paying stocks in the Dow Jones Industrials should sell them, foreseeing that there will be the recession ahead. The reason is that presently, stocks giving dividend income look to be the only safe investment options over the next two years.