Lay Low Until the Selling Slows
Thursday, February 7th, 2008
By George Leong, B.Comm. for Profit Confidential
On Tuesday, the DOW gave up 369 points or 2.92% while the tech-laden NASDAQ and small-cap Russell 2000 both plummeted by over three percent in a major sell-off. The decline in stocks followed a down day on Monday and clearly suggests capitulation. With the current bearish sentiment, we could see another test of lower support. Rising fears towards the condition of the economy and credit markets is the reason.
In addition, with the declining environment of interest rates, there is downward pressure on the U.S. dollar, which has been losing ground and has been discouraging foreign investors in U.S.- denominated investment assets. There continues to be speculation that countries will start to hold physical gold instead of the U.S. dollar. A country to watch is China, which holds about $1.43 trillion in foreign reserves and much of it in U.S. bonds, and may look to diversify outside of the U.S. dollar. This is a real threat that needs attention because of its potential negative impact on U.S. bond markets. If this should happen, U.S. interest rates may be pressured to rise in order to attract bond investors, but then we do not see this as a viable alternative due to economy.
As an investor, the prudent thing to do at this time is to be careful and wait on the sidelines until the selling subsides and then look for bargains.
In the meantime, there are also several things you can do to safeguard your capital. I have discussed these in previous commentaries, but it is important to be reminded.
I have always been a big believer in taking some profits off the table, especially when gains have been significant. I continue to believe in taking some profits on a portion of a position as the stock trends higher. In doing so, you would lock in some profits and make your position less vulnerable to the selling we are seeing.
Another strategy would be to make sure you have stop-loss orders in place to protect against a downside move. As each stock rises, move the stop-loss higher. I advise setting actual physical stop-loss orders rather than mental stops, as it removes any unwanted emotion in the trading process.
A third strategy would be to buy put options on a stock that you have a major position in or put options on an index that reflects the composition of your portfolio. Put options will help to minimize a downward move in the stock or market. In down markets, you can also write covered calls on stocks to generate premium income.
Next Post: One More Rollercoaster DivePrevious Post: Bargain Stock Hunting
Tags: gold, U.S. bonds, U.S. dollar
Tweet
Sign Up for PROFIT CONFIDENTIAL and
receive a FREE copy of our exclusive report:
"A GOLDEN OPPORTUNITY FOR STOCK MARKET INVESTORS"
We respect your privacy and
will never share your e-mail address.
George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
