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by John Dalt

9/25/11

We have finished the week, and if you’re like me…you are worn out.  We would have to look back to fall of 2008 to find a worst week for stock markets.

Maybe congratulations are in store, you survived it!  Your portfolio probably doesn’t look too good, but remember this kind of volatility will pass and we will return to a more predictable environment.

The market doesn’t go straight up and it doesn’t go straight down.  I know it is disconcerting right now, but the fear that is presently gripping the market will subside when we get some resolution to the eurozone sovereign credit problems.

You don’t check the value of your home every day, don’t freak out over the value of your portfolio every day.  If you own good companies or commodities, the world is not ending.  The stock market is simply going through a convulsion.

There is no shortage of doomsayers, and there is a real void of positive voices right now.  The VIX (fear index) is trading at elevated levels not seen since March of 2009.

If things go bad in the eurozone, the market could go lower….but, the elevated fear by investors suggests we are on the verge of a good rally.

Now is not the time to pull away from investing.

We lost money betting on higher interest rates this year.  Almost everybody did.  Why?  Because almost everybody was so sure interest rates were going to go higher.  It was the proverbial overloaded boat that capsized.

When everyone knows what is going to happen, it rarely does.

When every talking head on TV tells me the market is going lower, that tells me there is a good chance of a short covering rally.  This happens because the conventional wisdom is to short the market and all of those shorts are about to get their head handed to them.

We may short the market in our SwingTrading service, like we did last week…but you better run tight stops, and don’t be afraid to take a quick profit.  Remember bears make money, bulls make money, and hogs get slaughtered!

We are in a bear market, and will be until we can rally back up into the 1300 area.  That doesn’t mean we can’t have rallies.  In fact some of the biggest most violent rallies occur in bear markets because of the counter trend against the shorts.

Below is a chart of the S&P 500

The market is trading in a “range.”  I have drawn lines at support at 1101 and 1119.  These represent the levels that have brought out buyers and saw less selling for equities since August.  There is also a line at 1220 that illustrates the upper range of trading since August 6th.

A rally through 1220 would be welcome news for all of us.  Company earnings suggest we should head higher.  Third quarter earnings will start being reported in just a couple of weeks.  Bad news out of Europe could elevate fear.  Fear of bank insolvencies, fear of shrinking economies, fear of higher interest rates and taxes as European governments try to support their budgets and bailouts.

If this happens the 1101 support level could fail.  This puts the market into a new ballgame.  I don’t know your comfort level for shorting the market.  You can do this through “Inverse” ETFs such as SH, and RMW.   There are also “Ultra” short ETFs that move higher at twice the percentage as the loss in the sector or index they track.  You can review some different options on our website, under Investor Resources—ETF List.

You can use these short etfs to profit or to try to “level” your portfolio.  Leveling your portfolio means to have short positions or put options that appreciate as much as your portfolio looses.  You will never get exact correlation, but even a little can take some of the pain out of a sharp correction.

Consider buying a double, or even triple, inverse ETF of significant size if the S&P paints 1099.  You could use a conditional order to do this, with an immediate trailing stop of a small percentage.  If the fall occurs; it will be quick, it could be fleeting and it will hurt a lot of people.

We have all had enough pain; I don’t want you to be hurt again.  Also, whatever your investing style, if the market climbs back up to the 1200 level consider selling covered calls against your positions or selling half your stocks to raise cash.

You can always buy them back later.  If you pay more it is because the worst has passed.  If stocks are worth less, you can lower your cost as you reacquire your favorite companies at a discount.

Let me know how we can help you going forward.

John Dalt

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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