Aware of to Protect Your PortfolioKey stock indices are roaring higher—and this is making bulls happier, while bears are arguing the rise isn’t sustainable. Noise is at its peak. Regardless of this, investors shouldn’t lose sight of what is happening, and always manage their risk.
Since the beginning of the year, the S&P 500 has increased more than 18%. Other key stock indices, like the Dow Jones Industrial Average, have shown a similar pattern and have provided stock investors with profits.
Take a look at the chart of the S&P 500 below. At the very least it’s in a breakout mode. The S&P 500 broke above its long-term resistance, the price level where sellers dominate, around 1,550–1,575. It was tested twice—once in early 2000, and then in 2007—but failed to break above. Technical analysts would say what happened on the chart of the S&P 500 is simply bullish.
They would argue that when a resistance breaks, it becomes the support level—the price area where buyers dominate—and when the support breaks, it ends up becoming the resistance level.
Chart Courtesy of www.StockCharts.com
I’m not saying key stock indices will decline from here and the S&P 500 will come crashing down. The path of least resistance seems to be towards the upside, while I focus on risk management—knowing what kind of risks are present and what kinds of events investors can expect.
The first and most important thing investors need to note is that the key stock indices rising upwards of 18% in the first half of the year—for a 36% yearly move—may be too much to handle.
It wouldn’t be a problem if the U.S. economy was following a perfect trajectory toward high growth, but sadly, growth isn’t as impressive. Just pointing out the few more obvious problems: the labor market in the U.S. economy is bleak, there are still millions of Americans who are living in a home with a negative equity, and a record amount of Americans are on food stamps.
Second, looking at the earnings of companies on key stock indices, they have a fundamental problem. Their earnings are in line with expectations, which is considered good, but their revenues aren’t. What this shows is that companies on key stock indices might not be selling as much as expected. Their earnings might be coming from other means—for example, by cutting costs. We saw this phenomenon occurring in the first quarter, and the second quarter might be the same.
Lastly, problems in the global economy still persist. And let’s face it: companies in key stock indices in the U.S. economy have exposure to the global economy. If more troubles follow, their earnings can face some issues. Consider the economic slowdown in China and the eurozone.
At the end of the day, these are a few of the risks investors need to be aware of, because they can have great implications. Key stock indices can turn quickly, resulting in losses for investors’ portfolios.
Investors can protect their portfolio from these risks by focusing on the most basic risk management concepts. They should always have stop orders in place—this helps protect them from a sudden and unexpected downturn in the market—and they may want to consider taking some of their profits off the table. In addition, investors should also make sure they are not overexposed to just one sector or stock, or a minor move may just wipe out their savings.
This article Three Current Risks You Need to Be Aware of to Protect Your Portfolio Now was originally published at Daily Gains letter and has been republished with permission.
More Business articles from Business 2 Community: