Archive for the ‘Stock Market Analysis’ Category
A month ago, I expressed my concerns with the S&P chart and thought stocks were set for additional weakness. My investment advice was to be careful and not to chase stocks. Even after the one-day surge last Tuesday, I thought it was largely due to an extreme oversold condition resulting from stocks closing lower in seven of eight sessions. In my view, the bias continues to be negative and, until there is a base formation, I sense that stocks may edge lower.
More reality is creeping back into the stock market and the bear market rally looks vulnerable. With so much money sitting on the sidelines, a lot of institutional investors took the opportunity early this earnings season to nibble away at some long-term positions, as well as actually trade the market. There’s no doubt that the stock market’s been strong since achieving its new low in early March, but I think investors need to be very cautious right now. The news isn’t good enough for any sustainable stock market rally.
With the current bias to the downside, you need to have some risk management in place to avoid watching your trading capital disappear. This could be via mental or physical stop-loss orders. Or, if you want to avoid selling into a negative market, you could write call options on some of your stocks to generate some premium income and help reduce the average cost of a position.
However, the uncertainties make more downside moves in stocks likely in the near term and heading into 2009, which is turning out to be filled with uncertainty. We are clearly nervous, as a market bottom has yet to be established and this is where the risk is.
Another strategy you can employ is the use of put options as a downside hedge. I have discussed this in the past, but will reintroduce the strategy again. An option is a binding contract established between the two participants on the opposite side of a trade (i.e. the buyer and seller). A purchaser of a put option buys the right, but not the obligation, to sell the underlying instrument.
Establishing put options makes sense to me and should to you. The fact is that investment assets are valuables, probably having the first or second largest value after your home. By the time you retire, the value of your investment assets would be probably far in excess of your home value. So, this makes protecting your investment assets that much more critical, so you can enjoy that retirement.
You can establish put hedges for a single stock or a basket of stocks, where buying put options to … Read More
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