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Tuesday, May 1, 2012

Don't let the market gyrations fool you!

The stock market can do things to convince investors that they are "missing the boat" when the reality is that the market really isn't doing much of anything.  Case in point - late last week the S&P 500 moved back above 1,400 after sliding as low as 1,357 on April 10th.  Today we saw this major index climb as high as 1,425 before settling for the day at 1,405.  The run from 1,357 to 1,415, which took only about 20 trading days, represents a 4.3% gain.  Sounds pretty good, and if you were lucky enough to perfectly time the market and jump in at the April 10th low, and to sell at today's high, you would have indeed made about a 4% profit after commissions and before taxes in a very short time-period.

The problem is that no one is that lucky consistently enough to short-term trade the market; at least no one I have ever met or heard about.  The reality is, in fact, that virtually everyone was either in the market or out of the market during this time, so no one really benefited from this short-term pop in the overall market.

More to my point... the market really hasn't done anything over the past several months.  In fact, the S&P 500 was above 1,300 in early January, and broke 1,350 the first week of February.  It surpassed the 1,400 level in mid-March. (I sold a significant portion of my portfolios just after this.)  So, over the past 6 weeks, the market has gone down a little and back up a little, basically right back to where it was 6 weeks ago, so again, unless an investor got really lucky, the market hasn't provided any real returns for at least the past 6 weeks.

To watch the financial media each day, one would get the distinct impression that the stock market was rallying fast and strong, making people money hand over fist.  And while it is true that the Dow Jones Industrial Average did close at its highest level since December 2007, all three major indexes closed well off of their highs, especially the NASDAQ Composite, which had been up over 40 points during the trading session, but closed ahead by only 4 points.

It is easy to get caught-up in the frenzied atmosphere manufactured by the financial media, which thrives on positive market information.  However, investors should temper their enthusiasm for joining the mindless crowd, and make investment decisions based on fundamental and technical facts, rather than the ramblings of fools like Jim Cramer and company.  Investors need to ask serious and important questions, such as: What is the realistic upside potential for stocks from current valuations, in the short-, intermediate-, and long-term?  How confident can they be in the overly optimistic earnings projections provided by investment firms that fired all of the best analysts on the street years ago, most of which have major incestuous relationships and therefore conflicts of interest, since they perform investment banking services for the same companies they are recommending?  If the financial media is telling everyone on the planet how great things are, how many people out there are still waiting in the wings to buy this rally?

I could go on and on, but the point is that it is very easy to get sucked into the hype and make bad decisions with good money.  Don't be hypnotized by the media.  They are idiots, and they don't care at all if you lose money.

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