Guides for Investing in a Climate of Uncertainty

Economy: Recession or no recession? Europe: Repair or dismantle?

These are certainly interesting times we are living in, but they are equally uncertain. For instance, what direction will the U.S. economy take? Will it expand ever so slightly or contract? Is Europe already in a recession? With many EU members growing at less than 1.0% and several others under 0.50%, they could very well be in a recession now. What will Europe do to fix its debt problems? Oh, and that doesn't include the record debt levels of the U.S. Yes, there is a great deal of uncertainty out there. Uncertainty? I forgot to mention the additional regulation passed by Congress in the past two or three years. Moreover, will taxes rise or fall?

The important takeaway here is that things do not have to be fixed before the financial markets improve. They only have to "look" like the answer is at hand. Evidence? Last Monday, the Dow lost 400 points. That same week we witnessed the resignation of two European leaders and stocks rebounded nicely. Actually, the Dow was slightly positive for the week. One thing for certain (yes, there can be some certainty), the election of November 2012 will be important. Again, it's about perception. That is, until things actually do go south. Then perception gives way to reality. I prefer to focus on reality.

How do you forecast the direction of the market? There are a number of technical indicators upon which we may attempt to see into the future. One such indicator is the Directional Market Index (DMI). While DMI is very compelling, one must augment this with other indicators before forming an opinion. After all, if you get it wrong it can hurt you. 

What about you? How do you invest in this seesaw market without you and your clients getting whipsawed? Clearly, using ETFs with trailing stop losses can be helpful. Does your firm have this capability? Another approach is to use funds that aren't stuck in the "fully invested" mindset of the 80s and 90s. That would include fundds with more independent thinkers at the helm who aren't afraid to increase cash. At least you won't wake up shirtless. Better yet, if you can find a fund that uses trailing stops or downside risk hedging strategies, all the better. 

Talk back. Let's get a conversation going. 

Take care, good luck, and have a great week! 

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