The Shadow knows. There used to be a radio program called The Shadow where the hero, Lamont Cranston, the Shadow, would overcome the shadowy forces of doom by clouding the vision of those around him. “Who knows what evil lurks in the hearts of men” was their intro line. They were great shows and you can still find them on the Internet.
The stock market is kind of like the shadow. As you walk along with the sun at your back you cast a shadow. No matter which way you move the shadow stays ahead. Fast, slow, right, left. It doesn’t make any difference.
An equity market is the shadow of the economy staying out in front following every twist and turn. Depending upon the height of the sun the shadow may be long or short. You can see it either as a long term or short term prediction of the passage.
If you did not know what a shadow was you would not realize it is telling you something about where you are going. If you see the shadow fall across a hole you know you must step over or around it depending upon its width and depth. The path of our economy is predicted by the direction of the stock market. When things are good and everyone is making money the shadow seems to go up and when the economy slows (for whatever reason) the shadow darker and heads down.
At this time (11/04) the sun is shining brightly and the shadow stretches out long and friendly before us. The stock market is going up and everyone is feeling good, but we also know that tomorrow storm clouds may appear making our shadow seem to be a monster black image that hides the potholes in our path.
When that occurs we must be ready to put on our raincoat to protect what we carry through life. One of the most important is the money we have put aside for the time we wish to depart the path, sit by the road and contemplate all the beautiful things we have brought. That means we must guard against losing what we have created and not let the shadowy rain cloud wash them away.
That raincoat for your investments is an exit strategy for your portfolio. Without a plan to protect your assets it will be too easy to seem them washed away. This does not mean diversification which is what brokers want you to do. It means a plan to exit (sell) stock and mutual funds that are going down. This can be done with a simple percentage stop-loss order for your stocks and a mental stop loss for funds.
Brokers never want you to sell even though there may be a commission involved because once you money is in a money market neither they nor the brokerage company makes any money. You and only you care about your money so you must protect it. Think about an exit plan now and put it into place.
Do not become a victim of the dark shadow.
F*R*E*E investment letter www.mutualfundmagic.com
Author of best seller "IF IT DOESN'T GO UP, DON'T BUY IT!" Never lose money in the market.
Copyright 2004 Albert W. Thomas All rights reserved.
Former 17-year exchange member, floor trader and brokerage company owner.