The Time is Now

The Time is here and we are reviewing our normal investments for opportunities.  We have been patient for long enough and we are ready to dive into the market with some short positions.  The end of last week brought with it a good rally for us to trade.  The Dow Industrials is again in the 10,500’s and we just don’t think something like that can hold out much longer.  

In fact we are pretty certain that the much awaited “correction” will happen over the next month or two.  The US stock market has seen complacency in the face of quite bad news in the past couple of years and we must now act to preserve our liquid assets.  In the next few days we are going to see some reaction in the market.  You ask me how I know.  The reason I know is that the market is telling me.  Since early August the stock market has been struggling and now it is moving up again.  We had an interim peak in early September as traders (?) assumed Katrina would spur economic activity in the rebuilding effort.  Now later in the month we see another spurt higher but failing to actually get as high as the Katrina rally and falling far short of the August high.

The stock market is telling us in no uncertain terms that this near term rally is about over and the next big move will be down.  The hurricanes may have delayed the onset of real selling due to widespread, but probably misplaced, optimism about the “positive” effects of the hurricanes on the US economy.  

At the very least there is complacency enough to go around several times.  With the Dow sitting on 10,500 for the better part of two years, the stock market has had time to build a very significant top.  The major question is “What do I do?”  The answer is to get yourself away from stock market exposure.  If you want to participate in the downside of the market, then you need to determine your risk tolerance and how much of your capital you want to risk.  These are important points because you want to balance your risk tolerance with your ability to invest.  

For those of you who want to participate in the downside, there are several levels of trading that you can do.  First, which is a low level of risk, is to buy an inverse fund like we have been talking about for a while.  We follow the NDX (or the QQQQ’s) and think a good place to be is in the RYAIX which provides return inverse to the NDX.  That means if the NDX goes down, the fund value goes up.  What a concept!

For more aggressive short funds in the RYDEX family, you can purchase 200% inverse funds, like the RYVNX fund.  This fund provides twice the move that the RYAIX provides and both are in the opposite direction of the NDX.  This one tends to move quite a bit and may not be suitable for you.  Check your overall risk tolerance first before investing in any of these techniques. (We begin tracking the RYVNX fund on this site for the next couple of months.  We have purchased some already and are looking to add to the position on Monday.)  

Second, which is an average level of risk, you can short some stocks.  You may want to consult me before doing this, as this strategy is fairly risky.  You need to be able to protect yourself from loss and you can do this in various ways.  We can discuss via email or just use the comment section so everyone can get involved.  You don’t even have to leave your name.  We will figure out your questions.  We would recommend shorting stocks like INTC, GOOG, RIMM, YHOO, and our other favorite JPM.  There are several others too like AMAT and MER.  

Third, which is a higher level of risk is trading options directly.  This is something you should probably ask more about in the comments and probably shouldn’t actually do.  But, the most aggressive, a place where you can make a good return, strategy when the market is moving is to be in options.  We think options strategies could be used for a number of lesser risk positions too but we need to talk about them.  

Right now we need to focus on two things:  eliminating stock market exposure and possibly adding some exposure to the short side.  Hopefully the week will give us some good opportunities.

Dow Industrials:  10,568.70  +15.92  (five up days in a row)
BGEIX:  13.41  (last day of tracking this here—we will follow it but not report)
RYVNX:  20.65