As an investor, how much risk we take is a variable of the current market risk. Where the risk is and how we avoid or at least spread it around while investing for the contingencies is imperative.
Below is a chart of the S&P 500 Index. Resistance is 1304 on the upside, and it closed at 1293 on Friday, which doesn’t leave much room before we face some challenges technically.
The stochastic indicators are in the overbought territory, giving another technical warning sign, not to mention we have not once tested the move off the 1175 level in November. The first level of support, should we pull back, is 1260 and then 1225.
No one can predict the future, but being prepared is essential with your money. Your time frame, tolerance for risk, ability to withstand a draw down in your portfolio and your overall objective will determine how you manage the current risk relative to your portfolio.
(Click to enlarge)
What worries stand in the way of further progress for the broad market? Jobs, housing, continued Fed stimulus and the lack of sustainable growth in the US economy are a few of the concerns. The consumer is currently my primary concern.
The retail sales data for December shows that despite the positive outlook for holiday spending, the numbers were still below expectation. The success in some stores versus others shows that the consumer remains selective in their spending habits. The rise in gasoline prices to nearly $3.15 per gallon is taking a toll on the consumer as well. The more analyst project $4 gasoline prices by summer, the more the consumer psyche is impacted towards spending.
Inflation concerns are growing in India and China. Both countries have stronger economies, but inflation could stall the current growth. India has raised rates seven time in the last twelve months and inflation is still near the 8% mark. China has raised rates four times in the last three months and inflation is near the 5% mark.
What about the US? With a 2-3% growth rate and the consumer still fearful of the economic climate, we are not likely to see inflation spike higher. However, we are seeing a rise at the wholesale level and it could pass through to the consumer in time. That said, if the job market improves considerably inflation could spike as a result.
European sovereign debt issues are not over, they are just on the sidelines again. Portugal and Italy successfully auctioned bonds last week, dampening the default and bailout cries from the EU investment community. The markets rallied and everything is back to normal – right? That may be true for now, but the issues in Europe are far from over. Still plenty to be concerned about near term.
The trend is more stable (slow) economic growth in the US and the world. Interest rates are on the rise to curb inflation and most governments are attempting to exercise some form of austerity (maybe the US will follow).
Thus, the trend towards risker assets are starting to reverse. In fact, they are already in motion. Look at metals, energy and other commodities globally. Demand is declining and prices will follow, if they are not already in motion. Now is a good time to cut your exposure to commodities and lock in some gains. This is the first step in reducing the risk of your portfolio.
Disclosure: No position
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