A Guide to Stock Market Depressions

The idea of stock trading during depression is widely misunderstood by investors and non-investors alike. There are a lot of misconceptions about when it is a good time to invest (or not invest), what you should do during an economic downturn, and even what a "depression" is. With this guide to stock market depressions, you will hopefully end up being better equipped to know what to do in an unfortunate economic situation to make sure that your own fortunes make a turn for the better.

When people think of the word "depression", they inevitably think of the Great Depression that followed the stock market crash of 1929. However, depressions are not all that uncommon, though an epic one such as the one experienced at that point in time are relatively rare. Still, the economy is a cyclical beast, and upswings and downturns occur naturally. As a smart investor, it is your job to learn how to make money during either type of period.

Stock market depressions are often misinterpreted as a time to sell all of your stocks and go into hiding while you wait for everything to get better. This is really not a practical solution to what is a temporary problem. In fact, sometimes it is best to invest during a depression, as one of the basic guidelines for investing on the stock market is to buy low and sell high. Well, when is the price of a stock ever lower than in a time of depression or recession? As you can see, these are not times to "shut it down" and wait it out, but instead to make smart, informed investing decisions while the prices of stocks are relatively low. When the upswing inevitably comes, you will stand to make a nice profit!

Long-term investors especially should be prepared to take advantage of the conditions caused by stock market depressions. If you are willing to be patient and hold onto a stock that you buy at a low price during a downturn, you will definitely see it rise in the future, if you made the right decision. As with all parts of investing, however, it is of paramount importance that you know what you are doing and what moves to make!

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Stock Market Forecast For 2009

The stock market has declined over 40% since it reached the peak in October 2007. The S&P 500 index reached a high of 1,561.80 and over a year later has been trading in the 800 to 900 range. Does this mean the correction is over and we can now look for a new bull market to take place in 2009? We think it is unlikely. Why?

First, the market formed the left side of a parabolic pattern as the market essentially went straight up from 1982 to 2000. Even the 1987 crash now looks like a blip on a bubble formation.
In 1982 the index was at 103.71. Over the next 18 years it increased to 1,527.46. In other words the S&P 500 index increased by 1,500% in 18 years.

Starting in 2000 we had a sharp 3 year correction that sliced the gains over the last 18 years almost in half as the low on the S&P 500 index was 800.58. Then the market moved to a marginal new high at 1,561.80 over the next 4 years.

So to summarize we formed an ominous double top formation over a period of about 7 years. Since then in 2008 the market has started moving down again.

These types of double top patterns over long periods of time after a parabolic rise are very powerful chart patterns that signal much lower prices ahead. And when I say much lower, I mean much lower. It is not pleasant to say how this type of pattern often plays out, but here it is. The first real bounce would be expected down in the 800 area where the last correction ended. And in the latter part of 2008 that is exactly what has happened.

But I would not expect it to hold there for long. After that the next real hold area would be in the 450 area, but there is no guarantee it will even stop there. Even if it does we're probably in a depression or at least a painful recession.

Keep in mind this is an index of 500 stocks and some of them have earnings for now so I would not expect it to be as severe as some of the dot com stocks in 2000 that were taken to the moon on simply an expectation of earnings before the bubble burst. For example, YHOO topped out at around 200 and before it was over the stock was trading below 10 a couple of years later.

However, keep one thing in mind about earnings. If we go into a very serious recession or depression in the economy many of these companies will have negative earnings... in other words they will be losing money.

Bottom Line: The double top formation will not be broken unless the S&P 500 goes back above the old high of 1,561. This looks extremely unlikely in the next 12 months. I think the more likely scenario is that the market moves lower and at some point in 2009 the S&P 500 index dips below 500. The Federal Reserve and Congress are throwing trillions at the economy in hopes that we will avert a serious recession or depression. At this point I think the odds still favor a serious market and economic downturn despite their heroic efforts to stop this ugly scenario from unfolding. Only time will tell whether they will be successful, but I have my doubts unless and until I see encouraging signs in the economy. Until then the stock market is on shaky ground and subject to sudden and violent down days that will wipe out all those trying to pick the bottom in this market at this time before the final bottom is reached at much lower levels.

J. Cogburn

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Stock Questions You Must Answer

Before you buy a stock, there are three questions that you need to answer. Too many people buy stocks based on price alone or a gut-feeling. You should look beyond the price or the hot tip to the company behind the stock.

You may think that it doesn't matter that much -- you are a long term investor. However, it never hurts to choose your investments wisely. You need every stock in your portfolio to perform well. Otherwise, you are losing your future money.

Ask yourself the following questions before you purchase a stock:

Question Number One: What does this company do?

You need to be able to explain what this company does in a few sentences. Pretend that you are explaining it to your spouse or a teenager. They should understand the company after you describe it.

You don't have to know how they do what they do to explain what they do. For example, you don't need to know how to program computer operating systems to explain that a company makes computer software and hardware work in together. One more sentence, and you've just explained Microsoft.

Some companies have more difficult business models. But there are plenty of companies out there that are simple and offer great investment potential. Things don't need to be complicated to make money.

Question Number Two: Is the company growing?

You want to see a growth in earnings, a sustained growth history and revenue growth. Many investors overlook revenue, but it is fairly important. If revenue isn't growing faster or at the same pace as earnings, you need to research why. It could be a sign of decreasing earnings in the future.

Increasing revenue and declining earnings can be indicative of several situations. The company could be rolling out a new product line or entering a new market. Or, the management could be having trouble. Perhaps the company can't really compete and be profitable.

You have to do the research and see what the growth is and why it is. There is more to a stock than just a few numbers, you have to get the entire picture.

Question Number Three: What will you pay?

You've done a lot of research. The company looks pretty good, so you may be eager to go ahead and buy the stock. But you need to make sure that the stock isn't trading for more than it is really worth. It could be near a high point or riding on a hot market. You need to know where the stock price should be.

If the actual price of the stock is higher than where it should be, you would benefit from a little patience. Wait until it corrects itself before you buy. Watch the market for a bad day when everything is down. Sometimes industry news will affect an entire sector. The goal is to find a low entry point.

If the stock is much lower than you anticipated it would be, it might be a good time to buy. But you should try to find a reason why the price is under its true value. You may not find one, but it doesn't hurt to look at the company one more time. It may be that things have changed and your analysis is off. It is better to walk away than to take a loss.

When looking at a stock, you need to take a good hard look at the company behind it. Ask yourself the questions above to see if the stock is the right stock for you. Don't be afraid to take a second look if necessary. It is better to be sure than to lose money.

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What is Online Trading and How You Can Benefit From It

Trading has been around for the longest time, from since way back in the day in the old kingdoms when an egg was considered a form of currency and that could get you a relatively good dinner and a pint of grog at your local tavern. Fast forward to today and trading has caused a storm in the world economy. Anything that is within the sphere of demand and supply and can be traded between two parties is called a commodity, and this is the term being thrown about by traders. Traditional trading was done through phone, meetings, talks and a lengthy process of introduction that took some time before an agreement could be reached. Remember how long a free trade agreement used to take? Well in a certain sense traditional trading is similar but on a smaller scale. Now with the internet, online trading is the new 'it', because it is easier, faster and much more accessible for anyone to get into online buying and selling, making easy money from an upturn of demand and a drop of supply.

Online trading has crossed over to all sectors on the internet - from commodities like Forex capital, futures, stocks and bonds, metals, precious metals - even plantations in Burma and livestock in the Middle East, they are all goods and services that come under the umbrella term of commodities that can be traded with all over the world. This means more and more opportunity for you to make the money fast and open up several revenue streams for your benefit. It's all about the business inflow and outflow - how a business is performing in a particular market. You have to be a sort of economics Nostradamus - knowing how much business there will be in the future or even predicting trends, if any. For example, the Beijing Olympics and the developments that preceded it increased the demand for base metals and iron about 100 fold in the world metals market, which caused its price to rise a lot. Prudent traders bought up as much of the commodity as they could and sold it back to the Chinese market and thus made quite a bit of money from it. You see how easy it is? Well don't judge world shaking events like this as the only way you can predict how much or how little a commodity will cost. With a recession like the one we are currently experiencing, the demand for certain things is bound to drop and rise at the same time; it's just a matter of identifying what you can or cannot buy and when to do it.

Online trading is simply buying and selling and this is something anyone can do - a fact made that much more tenable by the fact that you can do it on the internet from home, with just a click of a mouse and market watching on your cable T.V. Learning is also an important part of your investment journey and once you wise up to the market you choose, you will sure make good money on the side.

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