Market Risk: Why Upside Moves Will Not Be Easy

By George Leong, B. Comm

October was one of the best months for the stock market in history in spite of the market risk. Everyone was buying and it didn’t matter if it was technology, industrial, or some new never-heard-before-technology. Everything went up, which is why we are now facing some selling pressure.
Up we go, down we go. Traders are currently jittery following the strong October. The month ended on a ghoulish note on Halloween. November looks like it will also begin sour, with a jump in market risk.
European stocks got hammered. The FTSE 100 moved down over three percent, while other key European bourses plummeted as much as five percent. The selling was driven by a major surprise when the Greek Prime Minister said the country’s new bailout plan resulting from the debt crisis would have to pass a national referendum—adding more market risk and unknowns to the European and global situations. The reality is that there are revolts on the streets of Athens, as people are fighting to safeguard their previous benefits and lifestyles. I mean, why would you not fight to protect a cushy job with early retirement?
But, as I have said on numerous times in the past, Greece is not the only country in trouble. The other members of PIGS also add to the market risk. Speculation is swirling that Italy may be vulnerable to default. The country is undergoing their own austerity strategy, but I expect some surprises to pop up and this will prop up the market risk.
There is also the renewed concern towards the slowing in Asia, as China’s factory activity declined to its lowest level since February 2009. The economic weakness in Europe is negatively impacting exports in China and other Asian countries and adds to market risk.
Going back to the U.S., the key stock indices have each breached their respective 200-day moving average (MA), while the S&P 500 has moved back into the red for the year.
The downside break is worrisome and could point to more weakness to surface on the charts, especially if the non-farm jobs reading this Friday are poor, as many expect them to be.
On the plus side, based on the seasonal trends, market risk may decline, as the months from November to April have resulted in the biggest gains for the DOW and S&P 500 in the past, according to the Stock Trader’s Almanac.
Technology has been better, with stocks advancing in eight months from November to June.
So, while there are the market risk and volatility, if you trade the historical patterns, ride the gains, but make sure you also take some money off the table.
I continue to recommend using put options or buying short-based exchange-traded funds (ETFs) as an offset to the weakness. It’s easy and cost-effective as a hedge.
Just take a look at the various indices that closely reflect your holdings or put options on individual stocks that you have a large position in. Index Puts include the SPY (S&P 500), QQQ (NASDAQ), or IWM (Russell 2000).
Take a look at what I had previously said about the global economy stalling in Stocks Facing Many Hurdles Ahead.
An area that has been under some pressure, but which I really like longer-term, is China’s travel sector; you can read about it in China’s Travel Market: Why It’s an Attractive Chance for Investment.

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You Profited Big on the Stock Market Rally…Now What?

By George Leong, B. Comm

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.

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