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Now What ? March 18, 2011

Posted by Tom in Thoughts.
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Right now, it looks like the world is coming unglued, and the US markets are holding up well compared to the rest of the world markets.  But, let’s take a look at one possible reason; the US Dollar.

The US$ has taken a fairly significant hit (i.e. lower value) when compared to most world currencies.  I don’t pretend to know why; inflation, fears that the Japanese won’t buy our bonds, etc..  Who knows.  The reasons are not so important, but the observation is.  With the US$ going down, it makes US stocks even cheaper.  With the US market (relatively) calmer than many others in the world, it could very well explain why US stocks have NOT gone down as much as others in the world.

Yes, I know the US markets are in correction, but compared to the European and Asian markets, we look “calm”; volatile, but calm.  IF that foreign money is coming into a stable US market, that could explain why we may be in a holding pattern for a while.  A basing formation, with little movement up or down, would be a good first step toward resuming a rally.

But . . . . (there is always a “but”), this market is as weak as it was back in early July, 2010.  The number of stocks below their 40 day moving average is significantly worse than previous minor corrections.  The selling has been much broader than before.  On Friday (3-18-2011) the S&P 500 index was up only 1.71% for the year, and all of that came in the last 2 days of this week.

So . . . Now What ?  Well, no one really knows, but it’s best to be cautious.  Newly accumulated Cash is sitting on the sidelines.  Many of my Long positions are holding up pretty well (excluding tech stocks).  Learning how to “hedge” a portfolio in this situation is a good idea.  (I am “hedged out”.)

What is “Hedging Out” a portfolio?  Space does not permit a full explanation, but here’s the basics:  One purchases a Bear ETF (which goes up when the market goes down), to counter act the exposure of the portfolio longs.  The idea is to use this one position to simulate a synthetic Cash exposure.  The trick is to estimate what amount is required to be neutral (which is outside of realm of this post).  The hedge is never perfect, but it does help to limit exposure and portfolio drawdowns.  Think of it as insurance.  The nice thing about it is, that it can be removed as easily as it was put on, with minimal disruption to your portfolio.  Saving time and money.  Something to ponder & research.

Next weekend I’ll be in LA for an intense 3 day class on high growth stocks & ETF’s.  There will likely be no posts, or maybe a very short one.  Cheers !

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