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This week, my Maximum Profit system flashed a cautionary signal, one I think all investors need to know about.
Right now, the stock market faces an unusual amount of headline risk, i.e., the chance that market-moving news events will occur. This is causing volatile price movements, and my system's risk-management rules are taking notice.
And although we know that news will probably drive the market in the next few weeks, we don't know whether the news will be bullish or bearish. In my opinion, that's why time-tested systems are the best way to trade. System rules will keep us from overreacting emotionally to the news.
Several big news items could agitate the markets in the months to come.
We could see headlines about Syria or Iran or Lebanon. No one knows what will happen in the Middle East, and that could impact oil prices. High oil prices can slow economic growth and have contributed to stock market declines in the past.
Closer to home, politicians in Washington are gearing up for yet another budget battle, which could harm markets. Their decision to fight about fiscal policy at a time when the Federal Reserve has created uncertainty about monetary policy seems ill-timed, to say the least.
There's no question the uncertainty has already taken a toll on the S&P 500. The index is now at a critical level:
SPDR S&P 500 ETF (NYSE: SPY), an ETF that tracks the S&P 500, has pulled back to its 26-week moving average (MA), which has stopped pullbacks four times in the last two years. We should remain bullish as long as prices are above this because they have not fallen more than 4% below the 26-week MA since the end of 2011. A close at $155 or below -- or at least 4% below the MA -- would be a warning that a significant decline could be starting.
It is impossible to know right now if the market will break this important level, so my system focuses solely on buy and sell decisions. When risk increased in 2008, for example, the system slowly moved toward cash -- and was 100% cash by the time prices went into a free fall in late 2008. In fact, my system generated a gain in 2008, while the market fell a portfolio-crushing 37%.
Hopefully, that bear market was a once-in-a-generation event. But I don't have to rely on hope alone, because I have a system that has avoided bear markets in the past and should do so again.
This week, my system signaled no new buys. This is a warning signal in itself; it means risk is too high to add any new positions. That doesn't mean a bear market is around the corner, but investors should be extra cautious.
So even though risk is high right now, it is important to remember that stock prices could still move higher. If the budget battle on Capitol Hill is avoided, for example, a relief rally could push stock prices to new highs.
Being ready for this means maintaining some exposure to high-quality stocks, and I am doing this by holding my open positions -- the highest-rated stocks held in StreetAuthority's portfolios. That means my current holdings are not only a "buy" according to my system, but that StreetAuthority experts like Amy Calistri, Nathan Slaughter and Elliott Gue researched each company in depth and expect them to outperform the market as well.
For now, the charts are showing that SPY is at a critical level. There are no clear sell signals, but there are also not any clear signals that the bull market will continue. The only clear signals we have are to hold the five stocks in the Maximum Profit portfolio. Those stocks are likely to outperform no matter which way SPY moves.
Note: My simple system tells investors exactly when to sell stocks before they tumble. Even better, this system has generated an average annual gain of 21.5% during the past decade -- trouncing the S&P's measly 7.3% gain. To learn more, click here.
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