U.S. stocks finished lower on the week as the ongoing crisis in Europe forges ahead. What didn’t help matters is that earlier in the week Greek Prime Minister George Papandreou tried to back out of the deal that the EU consummated just days prior. This sent our markets tumbling on Tuesday and helped create yet another volatile week. The Dow Jones Industrial Average (chart) closed down on the week 2.0%, the Nasdaq (chart) -1.9%, the S&P 500 (chart) -2.5% and the Russell 2000 (chart) -1.9%.
So how can anyone cogently understand how to trade or invest in this environment knowing that any point and time news out of Europe could jolt the markets in either direction? To answer that question you must first understand the type of trader/investor you are. If you are a long term investor (5 years or more) it is not too hard to find solid companies within the S&P 500 or any other major exchange to consider investing in. Simply go to a subject company’s balance sheet, look at their cash position, debt load and growth rate and you will be surprised at how many companies there are that have boatloads of cash, no debt, paying a dividend and are growing respectfully.
You must do some homework in finding these gems, but this is not too difficult. To me no matter what the day to day, week to week, or month to month gyrations are of the markets, these are the type of companies that you can hide in during these highly volatile times. Of course it’s always a good idea to conduct a check up on the balance sheets from time to time to make sure nothing dramatic is occuring that could change your view of any given investment.
If you are a short term trader/investor, say less than one year, or even of a shorter mindset, this type of market environment requires very strict guidelines as to implementing protective stop losses and clearly defining what you are willing to risk on each trade. This environment also creates much higher premiums in stock and index options that short term traders can definitely take advantage of. However, you especially need to do your homework here and have a complete understanding of how options can be an effective strategy in an overall portfolio. Options are extremely risky and require a high level of expertise in order to get this strategy working for you and not against you.
Point being this, Europe will continue to grab headlines, so do we run from this or do we embrace it? My feelings are as long as you have a defined plan with protective stops in place, and whether it is a long or short term strategy, opportunity usually occurs out of fear and volatility. Good luck to all.
Have a great weekend 🙂