Christmas Stock Market Rally possible – so be prepared

After all the gloom and doom everyone is hoping the worst is over and the stock markets will start to recover. A Christmas Stock Market Rally is almost becoming a self-fulfilling prophecy. The point for most Baby Boomers is that it may be a chance to reduce your exposure to the equities market either in your mutual funds or direct shares.

It now appears the private sector has placed its full confidence in the Federal Banks around the world to provide unconditional support to the financial markets. The Federal banks have demonstrated they are prepared to do whatever it takes to settle the markets.

Many governments have guaranteed deposits and inter-bank lending. They are prepared to print any amount of money to maintain market liquidity.

The banks can’t lose as long as the countries don’t bankrupt themselves. In times where governments can just print money at will, and almost every western country is in the same financial crisis, this is unlikely to happen.

It now appears the credit market is beginning to  free up although it is a slow process. However the credit market is like a multi-lane highway ready to carry heavy traffic again at a moments notice. Right now most lanes are closed. As soon as the other lanes open up again there will be a massive amount of banked-up credit traffic flowing.

Stock markets rise and fall on rumour. So it mayDJIA drops sharply in January after bonuses paid out be that in anticipation of the freeing of credit markets we are in for a sharp rally. The DOW might go to 11,000-12,000 and the Aussie All Ords to 5,200. I’m not predicting this. The charts have resistance at those points as far as I can see.

It makes sense as the credit crunch abates, that fund managers are under starters orders to aggressively buy stocks. They are cashed up. It is just the beginning of the 4th quarter. Shorting the markets is banned or limited at best. If they can drive the stock market up by 20% or more they can still get their bonuses and buy those expensive Christmas presents as they did last year.

There is more short term upside potential to the stock market with government backing through a possible spending stimulus. In Australia we will have $10.4Bn to spend and the US Congress looks like it might cough up another $300Bn before Christmas.

Remember last year? November 2007 saw a rally from a shaky October. This carried through until the end of December. Paper profits were locked in, bonuses paid out in real money  and then the market fell sharply in January.

Why would this Christmas be any different? It’s got the bonus of government backing this time around.

What’s in it for Baby Boomers? It may be your chance to reduce your exposure to the stock market in all or part of your portfolio depending on how much the market rallies.

It is likely the professionals will be selling into the rally to get as much money out as they can before the real economy dies in the new year as most economists seem to predict.

If you do not have much cash then I would certainly be trying to accumulate at least a couple of years worth of income, five years would be better. Put that money into your government guaranteed bank deposit account.

It is better to take a larger loss on some of your equity investments in order to accumulate some cash right now. That doesn’t mean selling everything at a large loss, just enough if you can to give yourself a financial buffer.

Having a financial buffer will give you some peace-of-mind if you still have a large exposure to equities. It means you might be able to hang in there to give the markets time to come back.

If your equity losses come within 10% of the capital you had back last November consider reducing your exposure to stocks further. Consider selling into the rally and grab what you can. At the very least try and put a stop loss in place or give clear instructions to your financial planner about what you want him to do if the market starts to drop again.

Prepare yourself for a serious economic down-turn after Christmas as de-leveraging takes place in earnest once markets stabilize and assets can be sold for something rather than being given away.

If the economy doesn’t tank you will be able to take advantage of what is likely to be a very different financial landscape once the regulators finish with it. Hopefully you will be in a position to protect your nest egg after getting much of it back too.

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