Accredited Investing Education

“Excuse me Sir, but would you tell me where the market is going and how I should trade it?”

Yes, but not without my usual disclaimer – it depends…

Direction

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This past weekend I was speaking at an option trading seminar in Miami, Florida along with Greg Jensen (CEO OptionsANIMAL) and Jon Najarian (Dr. J Najarian – CNBC and optionMONSTER). Near the close of the seminar, a participant asked me, “Which way is the market headed in the next couple of weeks and how should I trade it?” I paused as I thought about his question and my response. Just which way IS the market headed? It’s an excellent question which can only be truly answered once it has become history. So, how do we as traders deal with such uncertainty? How can we place a trade not knowing with certainty where the market, and therefore individual equities, will be at some point in the future?

In the world of trading there are a multitude of techniques and approaches to follow. The simplest of which is directional – simply buying or selling equities. From there, things branch out. The most effective way to become proficient in something a bit more complex than the old “buy and hold” strategy is to enroll in some sort of formal on-line equity and/or options training. For me, that meant enrolling in a small school that specialized in options spread trading. Why? Because like you, I do not have a crystal ball to tell me with certainty which way the market is headed. Through trading with options, and using hedging techniques, I am able to place and close profitable trades in numerous trends, not just one. So, the issue of market direction, while still beneficial to my trading, is no longer the dominant factor that determines my success or failure.

Getting back to forecasting market direction, here’s what I see. Earnings have beaten expectations for most of the S&P 500 companies to date. The list includes so many names it would be quicker to list those who did not! That in itself is fundamentally bullish. Over the past couple of weeks, the market has responded to this favorably, as it should. However, we are also long in the tooth on this bullish rally and with the normal “Sell in May and go away” phenomena, many are looking for a correction.  Will they get it? Perhaps. With revenues and profits soaring, the S&P 500 does not look over priced, by my own calculations I put the S&P at 1440 by year end.

“So, which way IS the market headed?”I expect the market will move somewhat sideways now as the earnings parade has already shown us enough to have a pretty good idea of Corporate America’s health. It’s doing well. Jobs are showing signs of creation in the important small business sector as well as the large. Companies are spending cash on capital improvements. Mergers and acquisitions have increased dramatically and the IPO market is expanding. These are all signs of a growing and increasingly healthy economy. The bears will be quick to point out the many issues that threaten our recovery – and they are very real.  The end of QE II, the debt ceiling of the US Government, Europe in deficit crisis, the hot Chinese economy, political instability in the Middle East and so on. So, with such uncertainty and the need to develop market expectation prior to trading, what is one to do? Quite simply, hedge, hedge, hedge…

When I trade, I look to place trades that will be effective in more than just one trend. How can I do such a thing? By understanding how options really work. Not just a visceral understanding, but a deep understanding of options pricing and movement. That’s not something you’ll learn in a two day seminar. Sorry, no “get rich quick” schemes here. It takes time, study and guidance to master the options instrument. Again, I recommend you enroll in an online training program,one with a real curriculum. One that takes you from start to finish – you know, like a REAL school. They’re a bit harder to find but well worth the search (I shamelessly recommend you check out OptionsANIMAL,www.optionsanimal.com, where I teach).

Based on fundamentals the market SHOULD move higher. However, with May now here, and trouble almost everywhere you look, some sort of a mild correction may occur. Here’s what I suggest you watch for. When you start to see the mainstream media increase its focus on negative economic events around the world, get ready for the correction. When the dominant news is about bad financial things, it’s a “tell” that the big boys have already gotten out of the market. At that point, the media is being directed to drive the markets lower. Yes I know, the “conspiracy theory.”Look for increased commentary on how fuel prices are causing consumers to reign in their spending. Watch for “experts” warning that increased foreclosure rates could derail the fragile economic recovery. In short, look for the big bad news to outweigh the good. Sadly, the media has way too much influence on the consumer which then has an effect on the stock market and your trades.

Which way is the market going and how should I trade it?Up, unless it doesn’t. Structure your trades to take advantage of more than one trend and be ready to make adjustments ifneeded. It just makes sense.

Jeff McAllister
OptionsANIMAL Instructor

PS – I wrote this Sunday morning while traveling from the Miami event. It is now Monday morning and the news of Osama Bin Laden’s death is affecting world markets. This is just the sort of thing I spoke of – some unexpected world event. They can and do shape the direction of the market, and your trades. Always keep your “radar” up and active…

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