The U.S. markets are once again in a minor correction mode, with the DOW retrenching over 630 points over the last week. This included two 360-point-plus loss days on November 2 and 7. The broader market, technology, and small-cap stocks have also retrenched. There is fear around the condition of the economy and credit markets. The selling has also impacted global trading.
In addition to the U.S. credit and subprime market, oil is at record prices, approaching $100.00 a barrel. The retail data are also due and there is now concern in that area.
The U.S. dollar is also continuing to lose ground and this could discourage foreign investors in U.S.-denominated investment assets. The decline in the greenback was driven by news that China, which has about $1.43 trillion in foreign reserves and much of it in U.S. bonds, may 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.
The prudent thing to do is to be careful and wait on the sidelines until the selling subsides and then there could be some bargains.
In the meantime, there are also several things you can do.
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 if you have a major position 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.