Will Japan Melt Down the Market?
By Marc Becker
Investors are worried about the effect Japan’s crises and market will have on their portfolios…and I can hardly blame them. Earthquake, tsunami, nuclear reactors teetering, over 10,000 dead. Scary stuff.
But before I get into that: I have been speaking to where the market is right for over a month as the last significant downturn began in April of 2010 due to Greece’s near insolvency. The market recovered quickly from the fear Europe would collapse and has done nothing but skyrocket. At the time the Dow was at its lowest resistance level since the market recovery began - 9,600 - and is up @22% since.
What is a resistance level? Anyone who has watched the market for two weeks or longer realizes it neither goes straight up nor down. The market tends to move back and forth between two points for some time before going higher or lower. Usually, after a period of weeks or months the market will break out of this range (spread); either above the higher point (the upper level of resistance) or below the lower (the low level of resistance).
Investors should consider our last low resistance level in the Dow was set at 11,400 after the Dow broke through this barrier last December. Until that point, the Dow had been moving back and forth between 11,400 and the previous low resistance level of 10,800 set in September of 2010. The spread at the current point is substantially larger than usual with the low at 11,400 and the high at about 12,350.
Most spreads we’ve seen over the last several years have been 600 points, + or – 100 points. The spread between 11,400 and 12,350 is almost 1000 points, nearly twice the norm in this market recovery phase.
This is important because the nature of the trader mentality (those frequently buying and selling on the floor) would look at the Dow over 12,000 as a prime selling opportunity to take profit.
Why does this matter? Because regardless of global or economic events, seeing the market retrace as profits are taken is somewhat predictable regardless of world events.
As an example, the Dow bounced between 10,800 (the previous low resistance level) and 11,400 for almost 2 months, finally breaking out over 11,400 at the end of the 2010. During that time the market was being tested and profits were being taken from the previous resistance level of 10,050 set during the third quarter of 2010.
Now enter Japan and fear of nuclear meltdown and the noticeable fact that the Nikkei (the Japanese equivalent to our Dow) has dropped by over 20% since the earthquake. When combining a natural profit driven pull back with a major global event it is easy to create rationale for another market plummet.
Just as it was when Ireland/Greece/Spain were in trouble, or AIG, or the BP spill, or the earthquake/tsunami that killed 300,000 in 2004, or the housing crisis, or…you get the point.
Primary emotional unrest right now is due to the fact that the stability of several reactors in Japan has been jeopardized. And if we were trying to profit by daily trading I would be informing you of speculative gutsy moves and guesses right now.
I am no different than any investor I work with. I don’t like watching downturns regardless of the coinciding event and much of what is going on in the world is worrisome. But I focus on 5 important things during such times:
1) Going up and down is the nature of the market in bad times AND good.
2) There are ALWAYS worrisome things going on in the world.
3) Regardless of #2, given time the market has ALWAYS gone up more than down.
4) The only thing that will stop this is the end of capitalism as we know it.
5) While I care, I don’t concern myself with today’s portfolio value – I concern myself with its value 3, 5, and 10 years from now.
In our current situation the reality is, barring a reactor event that destroys an entire country, changing direction right now is the worst mistake I could make as an investor.
We’ve been here before…exactly here. Remember Chernobyl, 3 Mile Island, and more?
My guess is that each day that goes by without a major deterioration in Japan decreases the likelihood of a major deterioration.
After surpassing the resistance level at 11,400, my expectation was that level would be retested, meaning that the Dow would dip back down close to that level after surpassing 12,000. Why? Because it hasn’t happened yet and that is what the market does.
The Dow stalled at 12,350 almost a month ago and began pulling back over a week ago. Then the earthquake/tsunami hit and elicited a reason for worry. So what would be a natural occurrence in a sublime world now appears to be another beginning of another end, still fresh in our minds from 2008.
I would not be surprised in the least, whether things stabilize or deteriorate in Japan, for the market to react for a period of weeks or months. As I said before, I would be more surprised for the market to increase by 20% and just keep going up.
Therefore, this is no reason to panic. Keep in mind most of you are reinvesting in a market that is taking a dip, meaning you are picking up more shares than you would otherwise.
For those working with us, we have set your allocations for the long term. Part of the long term (as any investor MUST be aware) is remaining disciplined through minor and major geopolitical/economic/market events. Ultimately, our greatest chance for success is to live fulfilled lives one day at a time in the present, while letting our portfolios live for the future.
Yours,
Marc Becker – Managing Partner Wiser Financial Coaching, LLC
Email: info@wiserfinancial.com
P.S. Remember last week when Libya (and two weeks before Egypt) were going to disrupt the Middle East, skyrocket oil and crash our economy? What happened to that?
