Will The US Economy Push Itself Into Recession?

For anyone who followed my articles on the Japanese earthquake, the Greek debt crisis and most recently the US government losing its AAA credit rating - you'd have read how all these factors have contributed in affecting a downturn in the global markets. And, so far what we've learned from it is that downturns can last a lot longer and be a lot more severe than most people initially think.

Fears have hit a peak, and traditionally, that can be a great time to be getting back in to the market. If you have been following our recent video market updates (for our members), you'll know that we think the US stock market (S&P 500 for example) is actually fundamentally strong, and is probably over-sold. But, there is a famous adage when it comes to trading the markets, and that is: "The market can remain irrational longer than you can remain solvent." Fear has gripped the markets, and that is a powerful force, to be respected, despite our fundamentally positive outlook.

So we would want to see confirmation that the market has bottomed out before going back in. In an effort to stabilise the markets, the US Federal Reserve indicated that the Fed would keep interest rates near zero until mid 2013, but even this announcement could not stabilise the financial markets for more than a single day.

Really, this is not so surprising, considering how many years the US has spent fighting off a crisis by pumping money into the financial system, introduced stimulus, and bailouts for the major banks. One begs to ask, what more can the US really do? The truth is, the US Fed have fired most of its bullets in trying to stabilise the markets already.

The US interest rates simply can't go any lower. The US budget deficit is out of control. The American people have no desire for more economic pain. So, in essence, the US government have pretty much tried everything, and are now facing severe limitations as to what they can do next to avoid another economic collapse. Put simply, the US may not handle another economic downturn. This comes from decades of making really, really bad decisions, which in turn has made the American economy so weak that if the current stock market crash sets off another major recession it would hurt. Really, really hurt.

We certainly do not need things to get significantly worse than they are right now. So, the questions is, can the markets recover and stabilise and prevent the US from slumping into major recession? The other important question is, what trading strategy can work well to make the most of a downturn in markets in a major global recession? - We can Write Covered Puts! The Covered Put strategy is just the opposite of the Covered Call strategy. You sell short the stock to cover the Put that is written.

The Covered Put strategy is a neutral to bearish strategy because you're expecting the stock to go sideways or down. In my TradeAbility Income Plus course, I am careful to explain the Covered Put strategy, and its potential risks. I also introduce you to CFD Hedging strategies, which are medium-term hedged (think: insurance) capital gain strategy. If you want to make your investment account much more resilient in the face of volatility, expand your income generation and investment opportunities, then this course can help you improve your long-term investing success.

Here's a few more tips that can be useful to help you keep your mind focused on the opportunities being presented during volatile and downturning markets... Managing your risk I am a firm believer that before investing your money you should decide how comfortable you are with investment risk, and especially know about how much risk you are prepared to take to achieve the returns you want. This is often referred to as your Risk Profile.

When we trade our TradeAbility Income strategies, we are very conscious of our risk profile. We tend to use between 20% - 40% allocation of our total capital in the Income strategy trade portfolio we place. Risk averse investors would allocate 20% of their capital, whilst those with higher risk appetites could allocate up to 40%. It all depends on how comfortable you are with short term fluctuations in the value of your investments. Understanding your risk profile and appropriate risk levels is a topic I cover in my TradeAbility Income and TradeAbility Income Plus courses, and understanding risk in uncertain market conditions such as we're seeing now can be a big help to you, especially if you don't want to lie awake at night worrying about your investments.

Take some profits off the table When markets are volatile, both the risk and returns available from our TradeAbility Income strategy can be amplified. At times like these, rather than spending your gains as income, planning on downsizing your positions (such as shifting down from a 40% allocation to say a 20% allocation) and building up your monthly income gains as a buffer against possible losses may be a good idea. It lowers net exposure and raises cash for your portfolio.

Don't fall for the psychological torture of, 'I'll buy more because it's going to come back.' If your risk portfolio says you're risking all your fresh gains in an uncertain market, then simply listen, put on the breaks a while, or you can place stops, or raise the stops already in place.

These steps can help remove some of the psychological battle, and help maintain a disciplined approach to the market. Diversify your portfolio How you diversify your portfolio has a lot to do with how well you understand a wide range of economic conditions. It is a good idea to build a portfolio spread across different asset classes, a variety of industries and individual companies.

Choose sectors that tend to move according to different economic influences. This reduces the likelihood of substantial losses when one type of investment is underperforming. Learning enough about the many industries and companies that make up a diverse portfolio can often mean a great deal of research is required to make good decisions.


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