How to Weather the Market Storm

The U.S. markets are in correction mode early in the year, which does not bode well for the remainder of the year if you believe in historical trends. Stocks across the board are facing selling pressure from large-cap stocks to technology and small-cap stocks.

The DOW and S&P 500 are currently over five percent in 2008. But the real selling pressure has been focused on the technology and small-cap stocks, with the NASDAQ and Russell 2000 down about eight percent and nine percent, respectively, in this recent week of trading. The Russell 2000 is below 700 and the S&P 500 breached support at 1,400. The NASDAQ is well below 2,500, while the blue-chip DOW is struggling to hold at current levels.

The U.S. dollar is also continuing to lose ground and this could discourage foreign investors in U.S.-denominated investment assets. And with the upcoming Federal Reserve meeting on January 29-30 and an expected cut in interest rates, there will be more pressure on the U.S. dollar to the downside and this could impact holding U.S. assets.

At this point, with the market chaos, 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.