Six straight weeks of growth and counting. Just when you think the markets will pull back, they defy all predictions and keep rising. This week’s charge was led by the usual suspects in the banking sector. The U.S. bank index has doubled since March 9 and the Canadian banking index is up approximately 50 per cent during this time as well. Is this rally going to continue for much longer? How should investors position themselves now that the market is up approximately 25 per cent from its early March lows?
This past week, three major U.S. banking institutions reported better than expected earnings to go along with the Wells Fargo earnings of the previous week. J.P. Morgan Chase and Goldman Sachs had fantastic earnings, which they followed up on by stating that they are looking to pay back government loans given to them in 2008. Citigroup, who also had unexpectedly good earnings, reiterated that this past quarter was their best since 2007 and if it wasn’t for an accounting issue, they would actually have been profitable. This is a tremendous turnaround from a sector many analysts said would continue to struggle with many more bankruptcies possible.
With a stock market as hot as this one, what should investors expect over the coming months, and what should their plan be? Most analysts and advisers, including myself, know that at some point this market will take a step back — nothing goes straight up forever. However, investors should not panic. A pullback is healthy for a longer term rally to take place. It is possible that we will see the market drop between five and 10 per cent. At that time (whenever it occurs) expect to hear the bear market analysts come out and say this is the start of something bad and that the markets will fall hard once again. Do not be fooled. Use this as an opportunity to either average down on an investment or take a position in a new investment you have been waiting to buy, because I believe the market will go higher this year and in 2010.
If you are an investor that is sitting on some significant gains at this time, you should be evaluating your investments to possibly take some profit as the market has had a tremendous run-up in the last month and a half. Individuals should always have a price target in mind when they purchase an investment like a stock. Once that target is reached, you can sell the whole investment, sell a part, or perhaps place a stop loss trade to protect your gains. For example, if you were able to purchase shares of Manulife Financial at nine or 10 dollars per share, not only would you be receiving a 10 per cent dividend per year, but you would have doubled your investment in the last six weeks. At this point, an investor can place a stop loss at approximately $19, which means if Manulife’s share price drops back to $19 or lower, the stock will automatically sell. However, if the shares do not fall in value to $19 or lower, the investor will continue to own the shares, earn the dividend and possibly gain further appreciation in price. (Please consult an advisor before using this investment strategy)
Investors that own mutual funds need not worry as much about when to sell out of their investment as they do with individual stocks. It is the responsibility of the mutual fund manager to know when to sell if and when a target price is reached. The number one reason to purchase a particular mutual fund is if you believe the manger of the fund is good. If an investor owns an index fund, there is no active management being done because the manager must buy all the companies in the index whether they are good companies or not. Thus if the index falls in value, there is nothing an investor can do. Their investment will fall as well. This is why index funds can often underperform well managed mutual funds in a down market.
All investors at this time should be evaluating their investments with their adviser for possible changes due to the huge increases in the stock market. Always remember, a loss is never a loss until you sell. However, the same holds true for a gain.
If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.
