Price Rebound Speculating for the Calculated Profit Seeker

Markets grow stranger by the day.  The more you follow them the more befuddling they become.  When it comes to the stock market’s day to day movements, there’s no sense to be had at all.  It ambles about however it may, without much rhyme or reason.

For instance, stocks closed out last week with a second consecutive week of gains.  In fact, the NASDAQ ended the week at levels last seen in 2000 – nearly 14 years ago.  On top of that, the S&P 500 is now just a hair way from its all-time high.

Was it a “risk on rally?”  Quite frankly, we really don’t know.  It could be any number of factors converging and diverging to compel investors to buy and sell.

We could come up with a whole host of reasons why the stock market could tank.  For one thing, prices seem a little out of whack.  The S&P 500’s price to earnings ratio, based on trailing twelve month reported earnings, is 19.48 percent.  The historic average is around 15.51 percent.

While not at nose bleed levels, stocks aren’t all that cheap either.  Sure the S&P 500 could go up from here.  But it isn’t likely it will double again…not unless there’s a significant drop first.

How to Get Ahead of 90 Percent of Others

The point is, rarely does it snow in California in August; rather, most days in August are hot and dry.  Or, another way to look at it, there’s a 50 percent chance your doctor was below average in their graduating class.

What we are talking about here is mean reversion.  Stock markets valued above their historical average will eventually revert down to – or even below – their mean.  Similarly, stock markets valued below their historical average will eventually revert up to – or even past – their mean.

What does this little tidbit of information tell us?  On a day to day basis, it doesn’t tell us much.  The S&P 500 is overvalued…yet it still goes up.

Over the longer term, however, it provides us with a helpful guidepost.  Are the markets we are investing in, or the stocks we are buying, overvalued or undervalued based on their historical average?  This, no doubt, should be requisite information before purchasing shares of stock.

When it comes down to it we’re interested in doing what we believe will work.  Like the tried and true ways to build and grow wealth that have produced for others.  Moreover, we want to follow the methods that can create family fortunes…even for those starting out with not much more than a penny or two to rub together.

To begin, a small grubstake must be gathered.  This takes hard work, discipline, and patience.  Perhaps these are things most people would rather skip.  But if you ever want to get ahead you must do them with rigor.

In short, it involves spending less than you make.  So, too, it involves making more than you spend.  If you can do this you will be ahead of 90 percent – or more – of others.

Price Rebound Speculating for the Calculated Profit Seeker

Once a starting pot of capital has been saved, the next thing to do is decide how to grow it.  You could buy a mutual fund that tracks the S&P 500, like your broker recommends.  Or you could do something unconventional…and even a bit risky.

Take agricultural commodities, for example.  Back in mid-2008 shares of PowerShares DB Agriculture (NYSE: DBA), which reflects the performance of the agricultural sector, were trading for over $40.  Yet when the financial crisis hit, they crashed all the way to the low $20s.

Despite a modest rebound to $35 in early 2011, shares of DBA have languished.  Currently, they’re at about $25.  But that could soon change…  For agricultural prices are remarkably cyclical.

Rising prices are greeted with rising production.  This, in turn, results in an abundance of food brought to market and, subsequently, prices fall.  Production then declines to the point where prices rebound.

At the moment, it appears that we are in the price rebound part of the cycle.  What’s more, a California drought or a late Midwestern freeze could help propel prices even more.  Of course, buying shares of DBA isn’t an investment.  Nor is it a long term holding…

It’s a speculation; a calculated bet that agricultural prices will rise over the next 6-months or so.


MN Gordon
for Economic Prism

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