Don't Be Blindsided by Market Opinions

Physician's Money Digest, April15 2003, Volume 10, Issue 7

Evaluating the direction of the marketto improve your investments in thestock market is vital. There's no need tobe fully invested at all times; it's muchbetter to follow a set of strict criteria forselecting stocks and to fully invest whenthere is a clear market direction. Manyphysician-investors follow carefully constructedmarket opinions when theychoose their investments. Consider theseopinions' value, though, before bettingall your assets on them.

FOLLOWING MARKET OPINION

In trying to determine the direction ofthe market, you need to examine manydifferent indicators. The following aresome useful factors to consider whenforming a thorough market opinion:

  • The success or failure of your mostrecent stock investments;
  • The recent activity of the market'spotential leading stocks;
  • Recent price and volume action inthe market's major indexes;
  • Current sector action;
  • The market's sentiment and overbought/oversold indicators; and
  • Breadth indicators.

Investors may also read and listen toa few respected market commentatorsin the hopes of gaining some helpfulguidance in their analysis of the market.Trusting what everyone under the sunhas to say about the market can be dangerous,but it doesn't hurt to read andlisten to a select few to see if they'respotting something that you're not.

After all this hard work is done, youhave your opinion of the most likely scenariofor the market. The valueassigned to this well-thought-out opinionthat you've developed throughobserving, reading, and studying is,well, nearly worthless. You should certainlynever enter a stock investmentbased on it. However, it does play a significantrole in developing your generalinvesting game plan.

ESTABLISHING A GAME PLAN

Forming an opinion about the marketand using that opinion to anticipatemarket action is a deadly game. Reactingto the market is most important. Marketopinion should not be used to enter aninvestment or trade. Rather, it should beused to put together a game plan tomaximize profits if you're right, and minimizedamages if you're wrong.

The game plan you put together willvary depending on your time frame andthe type of investor you are. One investmenttype that tends to work well, forexample, is intermediate term in nature,using a disciplined strategy of buying,holding, and selling a portfolio's stocks,that limits investments until there isclear, obvious market direction.

Your market opinion is your bestguess as to what the market may do.Based on that, you should be able to puttogether a game plan. If you're right,you should be able to execute your planand make some profits. However, everygame plan should also account for thepossibility that you're wrong.

At present, we seem to be in noman's-land, lacking any clear direction.The market is bouncing up and downon light volume, with neither strongupside conviction nor downside panic.A strong upward bias to the marketwould be a good point at which toinvest more aggressively.

Michael Doran is a privatemoney manager affiliated withSierra Capital Planning innorthern California. He runs afee-based business and a hedgefund for qualified investors. Formore information, call 877-467-8657 or visitwww.sierrainvestor.com.