Listen up folks, stock markets have had a great run advancing in five straight weeks and breaking away from or near to bear market status. There may be more upside moves ahead of us should the economy continue to improve, but you also need to be careful.

You have probably made some nice profits on your investment portfolio, so my advice to you is to take some profits off the table. I’m seeing some incredible euphoria amongst the bulls, but I do not believe stocks can continue to rally without some sort of market adjustment. I have discussed this belief numerous times in past commentaries.

If the economy doesn’t deliver jobs this week, your investment portfolio could retrench. The key now is to protect your profits by adopting strong risk management to protect your hard-earned capital. The last thing you want is to watch your gains disappear.

One of my favorite strategies I like personally to protect an investment portfolio is the use of put options as a defensive hedge.

Under this scenario, investors may be somewhat bearish or uncertain and want to protect the current gains against a downside move in the stock or the market with the use of index put options. By doing so, you are hedging your investment portfolio.

For those of you not familiar with options, a buyer of a put option contract buys the right, but not the obligation, to sell a specific number of the underlying instrument at the strike or exercise price for a specified length of time until the expiry date of the contract. After the expiry date, the particular option expires worthless and any responsibility is eliminated.

The buyer of the put option pays a premium to the writer of the option, who gets compensated for assuming the risk of exercise. The writer of the put option is obligated to buy the stock from the holder of the put should it be exercised by the expiry date.

For the writer of the put option, the amount of premium received for assuming the risk is generally directly correlated to the volatility of the stock and market. The more volatile the stock, the higher the premium paid for the option. And low volatility translates into lower premiums.

You can buy puts for stocks and sectors. If your investment portfolio is heavy in technology, you can buy puts on the NASDAQ. Or let’s say your investment portfolio has benefited from the run-up in gold and silver to record historical highs; a good strategy may be to buy put options on The Philadelphia Gold & Silver Index, which tracks 10 major gold and silver stocks.

If your investment portfolio is heavily weighted in technology, you can buy put options in PowerShares ETFs (NASDAQA/QQQQ), a heavily traded put used for defensive purposes.

It’s that easy. Just take a look at the various indices that closely reflect your holdings or put options on individual stocks that you may have a large position in.

In this market, safety is the key and your investment portfolio will benefit from it.

An area that I continue to like given the strength of metals is that of mining stocks. You can read about it in Why You Might Want to Look at Buying the Miners, where I list three examples of interesting mining stocks.

One of my favorite technology stocks continues to be Apple, Inc. (NASDAQ/AAPL), which you can read about in Apple Is Shining Bright…RIM Not So Much.

Most economic analysis hasn’t been accurate over the last several years, and it’s partially due to the severity of the financial crisis, which almost brought about the complete collapse of the stock market. While history is replete with all kinds of recessions (some more severe than others), memories are short on Wall Street, because that’s what most people are doing there—working for short-term gains.

Imagine if you were a Warren Buffett type of investor; you’ve already made enough money to live comfortably and you’re running a large investment portfolio, the purpose of which is to invest in businesses at good prices for the long term. Your holdings would reflect the general state of the economy, but you would relish the opportunity to buy more companies when prices retreat. That’s your business—to invest in good businesses and good managers. The returns are the returns. They can’t be predicted and that’s why the entry price is so important.

Big investors like Buffett and hedge-fund managers like George Soros invest a lot of money in a lot of different types of securities. They also trade around their positions as market conditions warrant. Soros has been selling gold recently, but still has a very large net long position. My favorite investment analyst, Jim Rogers, makes big, calculated investments based on a theme or trend, and then trades around the position as market valuations change. Before Rogers makes a big investment, however, he waits for the marketplace to achieve extremes in prices. In the absence of market extremes, he just waits. That’s how you have to be as an investor—patient and flexible.

We know we’re in a period of slow economic growth. We know the economy is sputtering, as are employment and the housing market. These are all structural issues that take a good deal of time to correct in the business cycle. So, from my perspective, it’s a hurry-up-and-wait kind of market.

Predicting the stock market is an irrelevant endeavor. Predicting earnings and cash flow from a business—now that’s a different story. I think we’re likely to see share prices continue to drift until second-quarter earnings season begins. Once again, the market will expect its numbers to be met and, more importantly, it will want to see improved corporate visibility for a stock to go up in price.

Predictions are just guesswork, but expectations for returns from stocks are currently being driven down. This makes the near-term outlook weak. But, it also makes outperformance later that much easier. Barring any major new shocks to the system, the market is setting itself up for an earnings rally at some point within the next nine months. That, by the way, is just a guess.

I don’t like being the bearer of bad news, but we have to keep in mind the investment risks that are out there. One of the biggest risks to your pocketbook right now remains the sovereign debt issue. Make no mistake, the issue of government debt (around the world) and the ability to service it is so serious that you should be planning for several countries in Europe to go broke. In fact, they’re already broke; they just haven’t declared bankruptcy yet.

I’m not kidding about this issue. Sovereign debt affects the largest capital market in the world—currencies (many multiples larger than all the world’s stock markets combined) and when currencies convulse, institutional investors get scared. When that happens, big investors sell and little investors get squeezed.

In a report from Reuters, which is covering a European summit on sovereign debt, the Portuguese parliament is expected to reject new austerity measures to get its fiscal house in order. A rejection of these austerity measures would force Portugal to follow Greece and Ireland in seeking an international bailout (which we all know is done with borrowed money!). Portugal isn’t a big economy by any means, but there’s a pattern forming here and it’s very dangerous. JPMorgan Chase figures the likelihood that Portugal’s government will fall this week is “high.” These growing sovereign debt issues could be the beginning of the end of the euro currency, and that’s a major shock that could have a cascading effect on your pocketbook. It’s no fun thinking about risks to your investment portfolio, but we don’t have any choice. Politicians of every stripe haven’t been honest with us. Eventually, someone has to pay for all this spending.

Currently, the spot price of gold is holding up strong based on risks in the Middle East/North Africa and because of the European debt crisis. I think the price of gold is going to stay strong, because global investors are increasingly concerned about the protection of wealth—not just the creation of it. It’s similar to the subprime mortgage meltdown that spawned an almost catastrophic stock market selloff. The issue now, however, isn’t individual mortgage debt—it’s country debt and unless this issue is addressed by global leaders, the subprime mortgage crisis will seem like a hiccup compared to what will happen if currencies begin to fall. Like I say, it isn’t fun thinking about this stuff, but we don’t have a choice anymore. Politicians around the world have been too quick to make big promises without saying how they’re going to pay for them. I’m afraid a big reckoning is coming and it will about sovereign debt.