Playing the Stock Market

By Heide B. Malhotra
Epoch Times Staff
Created: June 13, 2012 Last Updated: June 14, 2012
Related articles: Business » Global Markets
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Traders work on the floor of the New York Stock Exchange on June 6. Over the past weeks and months, we have seen an ebb and flow in the stock market. One day, investors are exuberant, while the next day they fall into gloom. (Spencer Platt/Getty Images)

Traders work on the floor of the New York Stock Exchange on June 6. Over the past weeks and months, we have seen an ebb and flow in the stock market. One day, investors are exuberant, while the next day they fall into gloom. (Spencer Platt/Getty Images)

Playing the stock market requires analysis and skills. Jumping into the stock market without doing one’s homework, understanding the intricacies of financial statements, knowing what expert advice to take, and trying to get one’s feet wet slowly, could result in significant losses.

“Playing the stock market is actually pretty serious business. While the rewards can be great, there is often potential for substantial losses that can be financially crippling if the investor has not covered all his or her bases properly,” advises an article on the eHow money website.

Would-be investors have used a number of tools to gain experience, such as The Stock Market Game, a product available since 1977 from the SIFMA Foundation for Investor Education.

“Students who participate in the Stock Market Game™ program learn more than investing. As they progress, they learn core academic concepts and skills that can help them succeed in the classroom—and in life,” according to an entry on The Stock Market Game website.

One should always keep in mind that despite having covered all the bases, playing the stock market is risky and a gamble, but the rate of return could be much higher than parking money in a savings account.

A Typical Day in the Stock Market

The week of June 4 through June 8 “was an up week for the major markets. For the week the Dow Jones Industrial Average gained 435.63 points or 3.59%. The Standard & Poor’s 500 Index gained 47.62 points or 3.73%, while the Nasdaq Composite gained 110.94 points or 4.04%,” according to the Trend Rules blog

The stock market, affected as usual by negative or positive news, got a jolt because of Federal Reserve System Chairman Ben S. Bernanke’s Economic Outlook and Policy report, presented to the U.S. Congress Joint Economic Committee on June 7. Bernanke was less than forthcoming concerning further stimulus plans.

However, President Obama’s June 8 remark, “It is in everybody’s interest for Greece to remain in the eurozone,” and other positive signs that could improve the U.S. economy, gave a boost to the stock market.

“Fed Chairman Ben Bernanke once again dashed hopes of further economic stimulus. … Bernanke’s congressional testimony also curbed the optimism that was sparked by China’s interest rate cut. Markets had been buoyed by the first drop in initial claims in almost a month, before Bernanke’s comments somewhat dented sentiment,” according to a June 8 article on the Zacks Investment Research website.

Investors Bearish Not Bullish

A number of investors and economists are concerned about a U.S. economic slowdown and consumers are taking such predictions seriously. According to the Conference Board website, the Consumer Confidence Index decreased from the end of April to the end of May from 68.7 to 64.9, a decline of 3.8 points.

“Here in the U.S., the S&P 500 has dropped 10.13% from its 52-week high, clearly outperforming other markets. I bring all this up, because, if the stock market begins to perceive that the economic slowdown in the U.S. will fall into a similar pattern to what the rest of the world is in, namely a recession, then U.S. stocks will be very vulnerable,” predicted Michael Lombardi in a June 7 article on the Profit Confidential website.

Lombardi provided a table, highlighting major global stock market slowdowns. Looking at a 52-week decline in the eurozone, Spain led the pack with the highest decline (42.40 percent), followed by Portugal (41.80 percent) and Italy (39 percent). In Asia, also based on a 52-week decline, India’s stock market fell by far the most with a 30.27 percent decline, followed by Hong Kong with a 20.44 percent decline.

An indication of consumer confidence is also the U.S. consumer savings rate. It was at 5 percent in May, up from 4.9 percent in April, indicating that consumers have not returned to their pre-financial downturn spending habits. According to Lombardi, in 2006 and 2007, the American consumer’s saving rate was at 0 percent.

“With the trimming of expenses all but done, companies have no other option to increase profits but to augment sales. With 70% of U.S. GDP based on consumer spending, increasing sales is easier said than done,” according to Lombardi.

Bullish on Investing in Stocks

“Not pretty, is how one would probably describe the markets for the past two months. So the best idea is to stay defensive, meaning utilities, consumer staples and healthcare,” suggested a June 7 article on the Rockledge website.

Although Federal Reserve officials are positive and upbeat, the market is reluctant to buy into all the hyped-up speeches. Therefore, over the past weeks and months, we have seen an ebb and flow in the stock market. One day, investors are exuberant, while the next day they fall into gloom.

The Rockledge article suggests that investors should not be overly eager, but to be cautious and wait for an upturn in the market. However, this advice doesn’t mean that investors should be completely restrained, but evaluate all factors affecting the growth or decline of a stock.

“The growth sectors such as industrials, technology, materials and energy were either mild or severe underperformers. This is certainly not a value-based portfolio allocation; this is pure and simple fear allocation based portfolio,” the Rockledge article suggests.

A recent Zacks Investment Research article states that at this time “there is only 1 catalyst for US stocks: the European Debt Crisis.”

The Zacks author suggests several reasons “why European debt containment would lead to U.S. stocks making new highs.”

The first reason is that the U.S. Gross Domestic Product, which is the market value of all goods and services at a given point in time, indicates that the U.S. economy is expanding by about 1 to 2 percent annually.

Secondly, corporate earnings are more than satisfactory. Thirdly, stocks are still reasonably priced, and many are neither under or overvalued. Fourth, holding bonds has become unattractive as, for example, a 10-year note yields only 1.7 percent, and savings barely generate any income. Lastly, investors are waiting on the sidelines with plenty of cash.

“With cash and bonds so unattractive, gold going nowhere and real estate still a risky bet, there will be a natural pull back towards stock ownership,” according to the Zacks article.

Evaluating a High Profile Company

“When it comes to fast-food stocks, one is head-and-shoulders above the rest. … I’m referring to McDonald’s Corp. (NYSE: MCD), of course, which I’m sure is no surprise,” said an article on the StreetAuthority website.

However, the author suggests that the McDonald’s stock is on a downslide, based on financial analysts’ opinions that forecast a slowdown in the firm’s stock growth. The main reason is that McDonald’s has matured and is faced with many competitors.

Putting information into perspective, the StreetAuthority article suggests, “Because McDonald’s is the world’s leader in fast food, it takes most of the blame for the link between fast food and obesity and for other types of bad publicity that affect the industry, even though competitors have similar products. This added burden places the stock at higher risk.”

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