This year, Christmas will bring joy to many investors with the stock market now nailing gains in excess of 30% for the NASDAQ and Russell 2000. Even if you are a more conservative investor buying DOW and S&P 500 stocks, your wallet still got bigger.
What has surprised me this year has not been the advance as much as the ability of the stock market to avoid a sizable stock market correction. The S&P 500 retrenched about 6.5% in May and June after the Federal Reserve first uttered the word “taper.” Yet the downcast mood didn’t last that long, as traders quickly entered the market and bought on the weakness. This has largely been the pattern this year, where any sign of weakness was followed by buying.
Chart courtesy of www.StockCharts.com
Now I’m not a pessimist, but I do believe in market adjustments along the way. At the beginning of the year, I predicted the stock market would move higher, but not at the rate and size we saw. Maybe a 15% upside, but definitely not 30% plus.
Record after record, the stock market appears to be looking to higher ground. I remain bullish at this time, especially if consumers decide to up their spending. Yet there’s still the lack of revenue growth in corporate America that hopefully could correct itself as we move into 2014.
At this point, you really should look to realize some profits, especially on your big winners, prior to the year-end tax season. To counter some of the gains, I suggest you also divest some of your dogs in your portfolio. Look, we all make mistakes; investing is not foolproof, and mistakes are inevitable. However, it’s an opportune time to dump losers, as the stock market advance has helped to drive up the price of even the poor companies.
In addition to liquidating some positions and getting set for 2014, I also suggest you look at hedging against a possible stock market correction via the use of put options. This investment strategy is used by pros and retail investors.
The employment of a put option strategy is easily done by buying put options for a stock or a group of stocks on the situation you may be weighted in a particular sector.
If you are heavily weighted in technology and small-cap stocks, you can buy put options on the NASDAQ and Russell 2000. In blue chips or large-caps, look at buying puts on the DOW and S&P 500.
Alternatively, you can also buy bearish ETFs on just about any index or sector, both domestically and for international stock markets.
Achieving success in the stock market is not about gambling, but about careful thinking and pursuing proper risk management strategies.