The market is up a lot which is a surprise to me. That I am surprised (read that as wrong) is of no real consequence to client accounts because (recurring theme alert) I do not want to try to out smart the down turn that I think is coming.
I am repeating this today because the action in the market is a good example of this idea. Some folks are nimble enough to game these types of moves, or they say they are, but I am not.
I had a chat with a client yesterday afternoon and told her that the types of themes in her account are they same ones that have been there for a long time. The market is doing its thing and taking a lot of oil stocks, foreign stocks and some others higher.
At some point the market will turn and as I have been saying I may or may not time it well but it will turn but there is no action to take until the market shows signs of cracking which it has not done yet.
I know from talking to people and from reading some comments that this idea of not needing to be smarter than the market can be difficult to grab onto. Fair enough, but the market tends to work a certain way more often than not. By being in touch with these ideas you can put the odds for success in your favor.
This guarantees nothing but it can help you sleep at night.
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1 comments:
Roger, like you, I am looking for a correction as well. My expectation is for a blow off rally to occur during the next few weeks, followed by a sizeable correction. Look at all the worries - Iran, Iraq, defecits galore, a president who can't balance his check book, rising rates, sky rocketing commodity prices......the list goes on. Sell in May and go away is the thesis that may ring true this year.
Only problem is that a lot of individuals, blogs and even wall street firms (http://www.raymondjames.com/inv_strat.htm) seem to be of the same opinion. Sentiment is not bullish (http://www.lowrisk.com/sentiment.htm). International markets that were in correction mode lately have already bounced back. The US markets are refusing to roll over and keep climbing that wall of worry. From a contrarian point of view, it seems the markets will keep going higher.
I can anticipate a top, but cannot time it. To protect myself, I can buy puts on positions I own, sell stock and sell calls - in that order.
I buy puts (Jan 06 expiration) first because that still enables me to participate in the market upside. Sure the puts will loose value as the market goes higher, but when the market heads lower, I will make back those losses in puts. The other reason behind buying puts first - if the scenario does not unfold as I expect, and the market starts to slide down from here, the puts will limit my downside. I will slowly buy puts to cover 1/3 of my exposure.
If the market does go higher, at some point, I will slowly start selling 1/3 of my stock positions - locking in gains.
Finally, when TA confirms a downturn, I will sell in the money next month calls on the final 1/3 of my position.
Of course, if the market does not correct, my puts expire worthless and since I sold 1/3 of my positions, I only participate with 2/3 position. But.....better safe than sorry!
Comments on the strategy?
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