Tuesday, March 08, 2011

8 March 2011 It’s Over


8 March 2011 It’s Over

Jimmie Rodgers first recorded the song and Elvis did a cover of it on his Elvis Aloha TV Special in 1973. We want to take some liberties with the lyrics for this special day:

If gains were not a moving thing

And I could make them stay

This horde of cash we share

Would always be

There be no correction day

To shine a morning light

And make us realize our rally is over.

Yes it is sad but true, despite the pretty day we had today the 9.3 million shares are below the DOWs average. We have to take a page from IBD today and call the rally over. Nice, but questionable news for Bank of America today (10% annual growth forecasted and dumping 50% of their toxic loans?) and a drop (temporary) in oil prices buoyed the market through most of the day. But let’s look at the trend. There have been 6 distribution days (heavy above average selling by insurance companies, mutual funds, and hedge funds) of late in all three of the major indexes and as IBD points out, even the leading sectors do not have any strong leaders at the moment. These are all signs that some wind had been let out of the sail. We agree with the IBD and Vector Vest, the market is in correction. How deep will be and how long will it last? Great questions. So what do you do?

1. Remember, in stocks the trend is our friend. We are seeing a negative trend, so keep your buying to a minimum unless you have tremendous faith in your stock.

2. Consider taking a profit now. Since this rally started on November 30, 2010, the market is up about 20%. If you have some gains like that, consider cashing in on any of your weak or questionable positions. Yes, cash out and pay taxes. There is nothing wrong with paying taxes. Besides they do such good things with that money.

3. Consider protecting your strong stocks with a little insurance. Let’s say you think AAPL Apple has some life left in it. (Although if you saw the recent Accum/Dist rating on the stock it would make you weep.) Let’s also say you are enjoying a 20% gain on the stock. If you had 100 shares, that would be about 7,100 dollars. You could buy some cheap insurance and buy a PUT option for June or July for about 3-5 dollar a contract in the $350 strike price range. That means if AAPL start to falter, your PUTs become more valuable. If AAPL continues to 400 by June than you spent 300-500 protecting your 7,100 in gains. Theoretically if AAPL were to drop to say 300, those Puts would be worth $3,000-$5,000 of course your 7100 would be reduced to 1,200. That’s why we call it insurance.

4. You could play some defensive stocks and ETFs, like Gold, Silver, Agricultural ETFs, the VIX, and other defensive strategies.

5. If you are in equity rich Mutual Funds consider changing them to more balanced or cash and bond funds.

6. Look at the IBD based CANSLIM fund CANGX, which is a top performer in good times and bad.

7. If you are comfortable with options, take a look as buying some PUTs against the index options. If you agree it is a correction and you think that overall market will correct, consider buying some 1 month to three month slightly out of the money puts against the market indexes.

It is important to remember that even if the market is correcting you can make money. It all depends on your risk tolerance. You can make money buy selling your positions and realizing the gains and putting the cans under your pillow. You can make money buy hedging your position with some PUT options. You can make money by betting on the correction by buying index options. Or you can loose those beautiful gains by doing nothing.

Remember to consider these defensive plays for your IRAs and 401 Ks. Hope this helps.

Salve Lucrum


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