markets

The Latest Stock Market Plunge: August 2015 down 10%

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Did the stock market plunge again? Are your positions wiped out or are you relishing the opportunity to find new entry points?

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The 200 DMA crosses the 50 DMA: is that the death cross on 8/11? Updated

When I was a student in college many moons ago, I remember on Sunday outside chapel, and on selected weekdays, a seemingly old lady would parade up and down the street, offering pamphlets, protesting and trying to gain exposure for her world view that encompassed the imminent ending of the world…

A Brief Moment in 1987

And for one brief moment in 1987, the stock market plunge of October wiped out billions of dollars in a couple of sessions.

Just recently, if you’d been reading recent headlines on the Street, like this one, you’d be tempted to believe the same stock market plunge had just taken place again!

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But is it? Is the end nigh? Or shall we all live again to trade and make money? Well, if you haven’t already guessed, I tend to the latter point of view. We will always prevail, perhaps a little wiser, certainly a lot poorer.

But we will all be investing again one day in the not too distant future, once we’ve licked our wounds after the current stock market plunge. At that moment, it might be hard to imagine as you and I are likely sitting on huge losses on our portfolios (I was down over 50% in 2008!)

Long way to go up – or down?

We should never use the past to judge the future, but previous statistics can be informative. The two most serious downturns in the 20th century were quite severe. The second crisis was in 1970’s when the Dow Jones dropped and the stock market plunge wiped out nearly 50% of the market value but what is worth noting: the greatest point loss (by points) was in fact only #17 in the total percentage losses.

In 2008 we were approaching a 45% downturn, and things have recovered well since then in the markets. There were only a few buyers out in the markets at the time, but many sellers so sell-orders swamped buy orders as companies, institutions, and individuals tried to unwind their risky positions, and save their skin. An awful lot of ‘unwinding’ was done before a more orderly market returned and there was more of a balance between buyers and sellers.

800px-DJIA historical graph

But in each of the downturns that occurred, people got back to business (eventually) and those downturn periods can hardly be seen in the chart above. But with markets still prone and intervention seeming not to work, we just have to figure out how to get from here and now to then.

Are we at the bottom, in the middle or at the top?

Many pundits are suggesting that the bottom of the market is not yet near, but that it is coming. While no one is sure of the exact time frame, several writers talk extensively about ‘capitulation’ – the notion that the selling is exhausted, and buyers’ orders match sellers’.

Jeff Cox of CNBC, writes “…But while hedge funds and industrial investors have been bailed out of positions, individual retail investors have still not reached the severe panic point.”

It’s quite likely most of us willl be steamrollered by the market as we jostle our buy/sell orders. I know I have: I now know the meaning of trying to catch a falling knife! He goes onto say that heavy volume will indicate that the capitulation phase has started, unfortunately we’re just not seeing that yet.

Cramer’s opinion always tells you what he thinks, EXACTLY. But you should take those opinions with a large pinch of salt!

So what is an successful trader/investor to do?

This is what I’m doing these days as I try to make sense of what’s going on, how I’m being affected by the latest stock market plunge, and where I’ll be in 12 months time:…

1. Keep eyes on your cash! It’s YOUR CASH!

Really, it’s just survival out there, that’s the name of the game now. Making sure that your cash is as safe as you can – verify that you have cash in the bank, that your bank deposits are sufficiently insured or guaranteed.

I’m planning to separate my funds into two bank accounts in separate institutions. While my own government authority has guaranteed deposits until 2010, having no access to these funds even temporarily could cause some cashflow problems, so I’d rather not take the chance.

2. Be better informed! Read, read, read…

I’m sure this is one that should affect us all! Here we are fretting about problems and issues that we all know little about: WTF is a Credit Default Swap? Well, since people are taking such risks with their money (and ours!), it seems that we have to all become better informed about the systemic risks these people are taking without so much as consulting us. I, for one, will endeavor to be much better informed about these matters.

3. Pie in the sky: that’s all it can ever be!

Skepticism has always been one of my strong suits, but now I’m becoming skeptical of the truisms, investing group-think wisdom, and aphorisms passed from advisor to client all over the world. I just don’t see why we should all be told that we have to invest in the stock market, expect 9% returns, and take SO MUCH risk without any chance of reward. No businessperson worth their salt would invest in a business like that.

Yet that is what most ‘retail investors’ face everyday. Yet every day, that investor is told to live with the risk of a stock market plunge wiping out not just some of the portfolio, but a lot of it! There will always be the risk of a stock market plunge! …

I’ll be adding to this discussion shortly, but I wonder: how were you affected by the crash? What are you doing to protect your investments? How do you see things now in view of the possible double dip that a lot of people are talking about?

Is the trend your friend? Investing in the Up or Down Cycle

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When you talk to stock market experts, one thing that they will tell you is that the economies of countries all over the world are linked much more closely together, to the point that they can easily impact one another.

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No longer do you have to think about just one economy if you are going to invest in something. You have to look at all of the trends, the news from the entire globe, and you have to consider how each story or event is going to play into each other. Only then can you make investments that are going to be successful.

Contracting Markets: Expanding Markets

For example, a failing economy in one part of the world might mean that more people are out of jobs. Consumers do not have extra money to spend on luxuries, on products or services that they do not need. All of their money has to go towards rent, food and other necessities that they cannot live without, while they spend their time trying to find new jobs. Can you imagine how the luxury goods market has been impacted in Greece, for example?

If you have invested in the stock of a company in your country that produces luxury goods, you might see their stock plummet. Were they making most of their money on exports, sending the goods to well-to-do people overseas? They may be based near your home, but their market could be everywhere else. When that dries up, they are going to lose a lot of domestic sales, even if the international sales keep going well. Or vice versa.

Taking Greece, as our example, the market for premium quality olive oil produced by local growers might contract as home consumers are hard pressed, and prefer to choose smaller amounts or cheaper brands; but export markets might welcome new olive oil for their salads or pizzas!

Depression vs. Recession: History Repeats

This is something that happened during the Great Depression in the United States, after the stock market crash at the end of the 1920s, and it happened again – though to a lesser degree – in the recent recession. When the economy was down, people were losing their jobs and their homes.

They stopped spending money on luxury goods from other countries. They held onto their savings or lived off of them. The economy is just starting to come back now, but a lot of luxury companies in other countries suffered simply because America was not doing well. And America is still one of the biggest markets in the world for exporters in Asia & Europe.

Does this spell opportunity?

Well, let’s take a look at some recent upcycle/downcycle stories. Did you buy Microsoft at $25 recently? If not, you’d be looking at a missed opportunity at an easy 40% upswing. However, if you had plonked your cash down for Lululemon stock, you might be sucking on lemons right now as they’re stock crashed nearly 50%.

And yet in those two stories, there are two vastly different products serving vastly different markets and in vastly different phases of the companies’ lives.image

Microsoft’s Rough Patch

Microsoft (NYSE: MSFT) has hit a rough patch with its consumer products division. Its new Windows 8/8.1 has not received much popular support despite being a nice OS; consumer staples are getting old; and repeated failures in Mobile have all challenged the ‘old’ dog. And wow! Have you seen those clunky Surface Notebooks? OMG.

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However, new upcoming products are getting good buzz. Business & Services are going gangbusters… and (let’s face it) Microsoft just isn’t cool right now. Is this a good contrarian play? Perhaps…

Lululemon: SeeThru Performance?

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Lululemon makes wonderful & popular quality Yoga & Sports Clothing for women (and men). (NYSE: LULU)

But botching a product redesign, consumer complaints, mishandling of their customer relations, a CEO switcheroo, and the P/E multiple got sliced in half.

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Have their products suddenly gone from hot to not? Or is their customer message as see-through as their Yoga bottoms? Clearly the market is voting one way on Microsoft and the other on Lululemon. But when it comes to the final weigh-in, will Mr. Market be right?

As an Investor

… you need to know how this cycle works so that you can decide when to buy and when to sell. If you sold your shares before the recession, you got the most out of them. If you then bought them back after prices plummeted, you could have made a lot of money in the upcycle, as things turned around.

Love to hear your take on this: What are you voting for? What are you weighing?

The origins of the stock market… from the Maritime Empires to Government regulation

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The origins of the stock market starts in 1606, when the first stock was issued. Trading began in the maritime empires of the Netherlands and Portugal. Those are the empires which revolved around sea travel and trade. From there the idea moved to Spain, England, and finally America, with the English colonists.

Raising Money For The War

So, anyways, back to the stock market here, in the US

In the beginning of the origins of the stock market, the practice of stock trading primarily involved the shipping and spice markets. considering that they started out in the maritime empires. The government of the time decided to sell bonds to rise money for the war.

Those are government notes that were promised to pay out some profit at a later date whenever they decided to cash them in. Then, right around that same time, private banks began issuing stocks to raise money. The whole creation was and is really ingenious.

Obviously, in time businesses decided it would be a good idea to raise money by selling stocks. This started in the mid 1800s. At first they weren’t regulated though, as they are today. Today, as you may know, companies have to be completely open to the public about their finances due to the Securities And Exchange Act which I will go into further detail in just a second.

Promoting the Stock Market in The New World

Who is Alexander Hamilton? Well, he was the first US Secretary Of The Treasury. But, relating to the current topic he is a mojor part of the origins of the stock market. Proudly he promoted the idea of bringing a stock exchange to America. He did this during his term, which lasted from 1789 to 1795. He studied how the British implemented the idea of a stock market and thought it would great for building a strong economy in America. If you ever take a trip to New York City, be sure to check out his statue, which is proudly held in the financial district.

New York Stock Exchange Board to… The New York Stock Exchange

The origins of the stock market also include the rich traders in New York City, who established the New York Stock and Exchange Board in 1817. That became the New York Stock Exchange in 1972 when 24 large merchants got together and decided it would be a great idea for the country. They also came up with the basic rules of trading, most evidently the fact that they would get together daily.

Eventually, the NYSE moved inside to 40 wall street. Then, in 1996 it was remodeled and become the 71-story building today known as The Trump Building.

The New York Stock Exchange is highly regarded among stock traders compared to the other markets due to the fact that they only include large, established companies. For smaller companies, they have to resort to…

The New York Curb Exchange to… The American Stock Exchange

As I’m sure sure you know, the NYSE is not the only stock exchange. There is also the American Stock Exchange, the NASDAQ, and many more.

The origins of the stock market state that government securities were traded outside on the corners of Wall Street and Broad Street in New York City. This was before the inside markets here in America were formed. I glossed over the NYSE. But, along with them, another exchange that came into play in 1842. They were called the New York Curb Exchange. As you may have guessed, they became the American Stock Exchange, or the AMEX.

In time… government regulationgavel
The origins of the stock market do not include government regulation when first starting out in it’s history. We take for granted that companies traded on the stock markets must be completely transparent when it comes to their books. I believe this is a good thing. It opens up companies for traders to make informed decisions. But, like the first generation of most things, the stock market was not regulated by the government.

During the industrial revolution, in 1900, the idea of one investor selling their shares to another investor for a profit came into play. This is what we know today as our commonplace stockmarket. Thus, the secondary market was formed, which is also known as The Speculators’ Market. And the market became more volatile because price became determined by supply and demand.

In 1929, the great stock market crash hit New York City hit New York City, and America. Obviously you probably weren’t alive then. But, we are going through the same thing now. It took fifteen years for the economy to fully recover. But only five for the government to step in.

In case you don’t feel like doing the math, that was 1934. The Securities And Exchange Act was passed by congress that year.

They formed the securities and exchange commission. They were created to regulate stock trading as well as police the daily market exchanges. And, they do that to this day.

The organization also includes overseeing the requirements for a company to issue stock shares to the public and ensures that the company offers relevant information to potential investors.

Over the years, the stock market went from a game of the rich to something being taught in school to 8th graders. If it were up to me, all kids would learn about the origins of the stock market at an early age.