Contributed by eToro
"The Dow Jones Reaches a New Record High" - This headline is hardly news anymore, due to US stocks reaching new all-time highs approximately twice a week, since the beginning of 2013. Nowadays the media is more likely to consider a week without record highs for the Dow as breaking news.
With that said, many analysts and traders remain skeptical about the reasons behind these dramatic moves. The US economy is certainly not performing better than ever before, and although data releases indicate recover (albeit a slow one), there are still plenty of reasons for investors to be concerned.
At the same time, Wall Street investors are singing an old and merry song, which goes something like this:
Money is cheap and credit is loose, time to invest, give the economy a boost.
What can we buy or what can we sell, when bond yields are low and real estate is stale.
Corporations will grow long term and short, so equity shares are the best to report.
What can we buy or what can we sell, when bond yields are low and real estate is stale.
Corporations will grow long term and short, so equity shares are the best to report.
We can see the strong sentiment very clearly by glancing at this chart.
You don’t need any lines to see the clear upward trend, but when will it end? And what can you do to prepare for it?
Social trading offers an interesting solution for dealing with bubbles such as this. As long as the bubble keeps inflating, it makes sense to take advantage of the upward momentum, however, if you know the downfall is imminent you also have to hedge your positions in the opposite direction.
This is where social trading comes in.
Social trading links traders from all over the world into one big network. It empowers traders to use each other’s skills and collective wisdom to trade smarter together.
Across a broad social investment network there will be traders on both sides of the fence and some who are sitting on the fence.
For example;
Robysms61 from Switzerland has a moderate following of almost 10,000 traders. Currently 3,705 of them are copying his trades with their real money accounts. He strongly believes this entire rise is a big bubble and is holding short positions on the Dow Jones and S&P 500. His Dow Jones target is currently at 13,000 just around that big gap from New Year’s weekend. (Here are Robysms61's results.)
On the other there is Schultieboy, a new trader from Holland. In just 2 short months this trader has managed to quadruple his initial investment and is currently holding some very green long trades on several different stock indices. (Here are Schultieboy's results.)
A wise investor knows diversification is key so, by copying both these traders, we should be able to profit from both points of view and trading timeframes.
Another cool advantage of investing socially is being able to gauge the overall sentiment, or the "Wisdom of the Crowd."
Since the beginning of the year, the social sentiment on the eToro network has been growing increasingly negative when it comes to the stock market. Point in fact: at the moment, 96% of our top traders are selling the S&P 500.
The following chart demonstrates the overall bearish exposure on the S&P of all the traders in the eToro network on a weekly basis since January 2013.
The black line is the monthly moving average, where we can see the bearish trend starting to emerge.
In the words of John Maynard Keynes, a very famous economist,"the markets can stay irrational longer than you can remain solvent."
As long as the markets remain irrational, the only rational thing to do is to spread your investment to cover all possible scenarios. This is the number one reason to diversify as much as possible.
You can achieve maximum diversification by copying diverse investors who are in turn diversifying their own portfolios. This way, whatever happens in the world your exposure will be spread out and much safer.
To learn more about social trading, visit www.etoro.com.
About the Author:
eToro is the first global market place for people to trade currencies, commodities and indices online in a simple, transparent and more enjoyable way.
eToro is committed to maintain the world’s largest and most trusted investment network, designed to financially empower individual investors through a simple, innovative trading platform and an active social trading community.
Today, eToro empowers over 2.75 million users in more than 140 countries worldwide to manage their funds through their innovative online investment platforms and active trading community, with thousands of new accounts created every day.
For more information on eToro, please visit their website.
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