Stocks Attempt Breakout!

Stocks surged this morning as the US DOllar continued to plumment. The chart above shows that once again, the S&P 500 is trying to take out the dominate downtrend line on a weekly close basis. The last data point is this morning's trade at 1084. While the week is just beginning, should we maintain these levels through Friday's close, expect a new, major surge of money into the market, pushing prices again up to the old highs!

Does this sound irrational? Yes, but who could have imagined that the markets would have recovered so dramatically. For sure, the big banks (although we hear about continuing bank failures and mortgage defaults)continue to do well and bankers continue to receive their multi-million dollar annual bonuses. Ever-increasing unemployment numbers are dismissed as commentators report that businesses no longer need employees to grow profits.

PLAY IT SAFE

While I have been generally dismissing the continued rally since taking profits in June, I have been participating somewhat by using longer-termed options. I currently hold call option positions for Archer Daniels (ADM), Applied Materials (AMAT) and Williams Energy (WMB). Also in my portfolio are put positions for Boeing (BA) and JB Hunt (JBHT). I previously held Merck calls and they were exercised, the stock was held a little longer and then sold at a profit.

Although I have traditionally been an option seller, as many of my articles attest to, in times like this, it seems to be the prudent way to play the market. With options, you can defend your annual targeted gains but still have some participation in the markets without risking too much of your capital. If the markets continue to soar, you will profit. Should the markets suddenly reverse, your losses will be limited to the cost of the options.

CONTINUE TO DIVERSIFY

As I mentioned, I have some diversification in my option portfolio with some call positions against some put positions. This enables me to perhaps profit no matter what the markets do, I have something on the up side as well as something on the down side. It's also important to buy as much time as you can. My call options are out until 2011! as I like my call choices as bona fide stock picks, but I don't want to ruin my performance record for the year. There is still a lot of risk in this market and the huge runup just continues to show that government and Federal Reserve policies cause asset bubbles. It really is a casino-like atmosphere here but investors have no choice except to participate in high-risk investments. Those who have tried to be conservative cannot exist. Interest rate vehicles have been artificially held down to historically low levels while the cost of goods, services and taxes continue to rise sharply.

Should you wish for more information about how you might better manage your risk, contact me at gary@assetdesigncenter.com.