Stock Market Investment Basics – Part 5

The Stock Market Rise – Fight Inflation With the Mini-Dow Jones

You may have noticed that the Dow Jones stock index rose a whopping 900 points one recent day. That’s impressive, even if price does not continue to climb. And that’s the problem: a one-day wonder is only useful if you know the signals that allow you to jump in and make some money.

Knowing the signals for trading a falling market is also important. One indicator that the stock market may be in trouble is inflation. Anna Schwartz is 92 years old and one of the world’s most respected economists. Look what she says about inflation:

“The Fed pooh-poohs inflation because of a perceived slowdown in oil and gas prices. But theoretically any increase in the monetary base must be met with a tightening if inflation is to be avoided. Right now the Fed is pursuing a pro-inflation strategy by lowering interest rates and showering the banking system with liquidity. They’re not even considering inflation.”

When interest rates are lowered, they encourage inflation. Guess what the Federal Reserve did today, October 29, 2008? Cut rates. Again.

If you care about your future, you should be considering the affect inflation will have on your way of life. Ponder this headline: World Will Struggle to Meet Oil Demand. These words appeared today, October 29, 2008, on the front page of the Financial Times.

More oil will not miraculously appear and save the world from this shortage. Therefore prices will rise dramatically. The rise will be another alert: inflation is here to stay. Unbridled inflation will harm the stock market. And the buying power of your American dollars.

If the stock market rises, by all means ride it. But don’t sift through thousands of stocks. Learn to trade the mini-Dow Jones futures contract. That way, all you have to do is choose direction. You’ve got a 50-50 chance of being right. Do you like those odds better than choosing from a long list of stocks in various sectors that may or may not rise with the tide?

If the stock market falls, ride the mini-Dow Jones futures market. It’s legal, unlike some of the nefarious short-selling you’ve heard about in stocks. In the mini-Dow Jones market, the mechanics of selling are well-established, transparent – and entirely legal. (Did I mention, easy to learn?)

It is true that the mini-Dow Jones contract rides up and down with the stock market. The difference is speculators can use relatively small amounts of money to leverage powerful positions in the market. They never actually buy or sell stocks. The individual is merely “shorting” or “selling” when the index trends down, or going “long” or “buying” when the index is rising.

That 900 point rise in the mini-Dow Jones was precious. Each tick equals $5. That means one contract would have earned you $4,500 on that move. What if you had bought 10 contracts?

But let’s get real: It is very doubtful that you would have caught every one of those 900 ticks. But what if you had caught 25-30% of the move?

Are there risks when trading the mini-Dow Jones? Yes. Past performance is not necessarily indicative of future results. And in this economic environment, what goes up one day may come down the next. Be ready. Don’t miss the inflation signals.

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