Monday, December 3, 2007

Predicting Stock Market Direction

Wouldn't we all like to have some insight into where the stock market is going? I am often asked if I know what the stock market will do. I would be the first to admit that I am not a psychic in that regard. But, I have known for some time that there are ways to predict the direction of the stock market. And no, I am not selling you some get rich scheme. These predictive insights come from the stock futures markets.

The Chicago Mercantile Exchange (CME) trades stock market futures contracts. Specifically these futures contracts are for the S&P 500 and Nasdaq 100. You can often get an idea of how the stock market will do in early trading. The prediction that the CME tells you gets more accurate as you get closer to the opening of the stock markets.

The CME website has a page that shows Globex Flash Quotes. These are quotes for indices. Because of the global nature of the Globex, quotes are often available after hours, and before the market opening. In the example above, large-valued red numbers for the S&P and Nasdaq futures portend a down day in the stock market. Green numbers would predict an up day. However, I will warn you that these "predictions" are only really accurate for about the first half-hour or so of trading. I am sure that you've seen it happen many times where the stock market opens up in the beginning and ends significantly lower. Or the stock market drops in the early minutes of trading, only to recover significantly before the end of the day.

Other places to look for a predictions of the stock market are in the International Market indices. These indices tell you how the overseas markets are doing. If the markets in Asia and in Europe have had a down day, it is likely that the US markets will follow suit.

As a side note here, my DW and I had the opportunity to visit the CME several years ago (before we were married) when we were visiting Chicago. Sadly, however, the CME visitor gallery where you can view traders on the floor of the exchange has closed to visitors since September 2001.


Friday, November 2, 2007

Misc. 401(k) Plan Facts

I've come up with a short list of miscellaneous facts about 401(k) plans that are not so commonly known. As always, I'm not an expert, so you might want to contact a tax professional for clarification.

1) Company stock: when you take a distribution, you can take a distribution of stock shares, and pay ordinary income tax on your cost basis. You can hold these shares outside of the 401(k) until you sell your company stock shares. You will then pay taxes only at the lower capital gains rate on the amount gained.

2) 401(k) plans are qualified plans that afford you greater legal protections than a rollover IRA. Of course, this only comes into play only if you are sued later in life.

3) 401(k) plans have a fiduciary duty to invest your money. What this means is that the 401(k) administrators need to select appropriate investment choices for you. This is not the case with an IRA.

4) Contributions to 401(k) plans are indexed to inflation beginning in 2007. In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act that set forth a schedule for the increases in 401(k) contribution limits. Through 2006, this was $1000 per year. From 2007 onward, the contributions are indexed to inflation (known as a cost-of-living adjustment) rounded to $500 increments. The small increase for this year is because the inflation rate is low. For 2007, the current contribution limit is $15,500.

5) In-service distributions: You don't need to quit your job in order roll money from your 401(k) into an IRA. Companies don't advertise this fact, but in most cases you can request an "in-service distribution" and roll that into an IRA while you are still working there. You will need to read through the company 401(k) plan documents to find the details for your plan.