With so many moving parts it’s just as difficult to avoid knowing what to watch as it is to keep from being distracted. Here are the pieces to the puzzle that can help you focus on this market.

To begin, I suggest when you hear about the stock market in the news the index to focus on is the Dow Jones Industrial Average and the number to watch is 24,000. It is my opinion that this number may become either a ceiling or the floor. According to Yahoo Finance, as of mid-day April 18, 2018, the DOW is at 24,771, +0.23% year-to-date from the beginning of the year. The Dow’s highest closing took place on January 26, 2018, at 26,617 making for a year-to-date gain of 7.7%.

Design your exit and entry strategy

Springtime means the earnings season is in full bloom. When there are surprises to the upside investors can expect stock prices to go up. On the other hand, when companies miss their earnings expectations losses often follow. For the most part, Wall Street analysts project higher profit margins thanks to buoyant sales and increasing operating profits.

John Del Vecchio at Dent Research is a co-author of, What’s Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio submits, “There’s a disconnect between the market and the typical company.” On April 18, 2018, Del Vecchio went on to say, “Government statistics compiled from all corporations show that not only did profit margins peak years ago but that the trend has deteriorated further over the last 12 months.” The distinction boils down to the fact that private companies are not able to do something that public companies can do that often makes a big impact on profits. Public companies are able to buy back stock.

‘Shareholder yield’ is when companies pay a dividend or buy back stock. One would think returning capital returned to shareholders is always a great thing, but maybe not always. As Del Vecchio put it, “Not all shareholder yield is created equal.”

“Risk is not knowing, what you’re doing.” – Warren Buffett

The market is currently contending with geopolitical issues, potential trade wars with China, volatility in valuations, North Korea tensions, and war in the Middle East. As Ryan Vlastelica, MarketWatch, reported, thanks to Bill Lynch, Hinsdale Associates Director of Investments, April 12, 2018, “There’s a lot of uncertainty right now, and while much of it is related to economic issues like trade, it’s also coming in regards to the corporate earnings season. We just don’t know if it’s going to be as strong as estimates are currently indicating and I think that’s behind a lot of the volatility that we’ve been seeing.”

As I wrote previously, if the bulls get a full head of steam it would not be surprising to see the DOW reach 28,000. But do not be complacent. You may recall my sharing with you January this year that Jeffrey Gundlach, founder, DoubleLine Capital LP, said he believed the market this year would first see a 15% gain, but finish 2018 in the red. According to Barron’s, March 17, 2018, Gundlach, “The celebrated bond-fund manager sounded alarms about housing in 2006, later warned that the subprime market was a ‘total unmitigated disaster’ about to worsen, and anticipated severe economic downturn, to boot.” In the same article, Gundlach said, “I expect the market to close the year down.”

To prepare for the good, the bad, and the unforeseen, let me suggest that you determine today how much loss you can accept whether by percentage or dollar amount. You might want to start by going back to see how the 2008 drawdown affected your investments. Then look to see how long it took your accounts to get back to the same value at the beginning of 2008. Next rather than remain unconscious in the belief that hope is a strategy, take advantage of technology improvements to see how active management strategies may have been applied so that risk assets were taken off the tracks by being moved to cash or alternatives. This way the devastating train could run without your account getting hurt because some or all of your bonds and stocks were systematically sold sitting in a money market account. Again, think of Karate Kid, risk on/risk off. Finally, as part of your exit strategy, look for investment vehicles outside of bonds and stocks.

In the article “Why stocks could fall nearly 40% over the coming 18 months,” by Ryan Vlastelica interviewed Nicholas Colas, co-founder of Data Trek Research put it this way at MarketWatch, April 11, 2018, “It only makes sense to plan, if only to understand the downside through the lens of preparation, rather than the rear view mirror of regret.”

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