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The Stock Trading Advisor’s “From
the Trading Turret”
From: R. A. Christy
Editor, ‘From the Trading Turret’
President/CEO, Christy Investment Group
http://www.christyinvestments.com
Date: January 20, 2008
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The Markets |
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YTD Performance |
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The Dow |
12,099.30 |
-8.79% |
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The NAZ |
2,340.02 |
-11.77% |
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The S&P 500 |
1,325.19 |
-9.76% |
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The Indicators |
Column |
Percent |
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Our Field Position |
DEFENSE |
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NYSE Bullish Percent |
Os |
20% |
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OTC Bullish Percent |
Os |
20% |
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Optionable Stocks Bullish
Percent |
Os |
20% |
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S&P 500 Bullish Percent |
Os |
18% |
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Where We Stand |
YTD Performance |
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Strategic Long/Short |
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Strategic Sector |
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Managed Forex |
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Favored Sectors: Protection and Precious Metals
This week’s diatribe…
To say the market continues to be
volatile place is a pretty big understatement. I’m not big on New Year’s
resolutions, but one of them certainly wasn’t giving back last year’s
gains.
The Dow Jones Industrial Average (DJIA),
NASDAQ Composite and the S&P 500 (SPX) are down a bunch in less than
three weeks of trading. Time will tell whether this is short lived or
not.
This year, we’re off to the worst
start in history. The indicator lows we’re seeing right now take us back
to 2002. We started 2003 in similar fashion and that turned out to be a
great year. It might be ugly, but all isn’t lost – at least yet.
I don’t know whether this is just a
correction or the start of something really ugly. What I do know is this
– managing our trades (risk) is the most important and the least talked
about aspect of the investment process.
There is no one right answer to
managing portfolio risk, but there are a number of different ways to
manage risk in the market. Here are some of the ways that I use:
Sector Rotation
Every year one or two sectors really
hit the skids. Last year, it was the home builder and the financial
sector. The hits these two groups took were brutal. One the other side
of the coin, there are always one or two sectors that really shine. Even
in markets like we are experiencing now, there are sectors going higher.
In the table below you’ll see the
differential between the best and worst performing sectors over the last
decade and the tremendous spread between the two.
Sector rotation is one of the most
effective ways of managing portfolio risk. One of the reasons that I use
Point & Figure analysis is that the bullish percent and relative
strength indicators drive us away from the weakest sectors and into the
strongest sectors.
Increase Cash
During times like these, it makes
sense to vary the percentage that you have allocated to various asset
classes. Currently, my assets are deployed between Cash, Equities,
Commodities and Currencies (forex).
At times it may not feel like having
exposure to one of these other asset classes is helping all that much.
The financial channel talking heads are equity “perma-bulls”. That’s
their focus. But, since 1972, the S&P 500 and commodities sector have
posted negative returns only twice in the same year.
In the example I show below,
equities account for 60% of the portfolio and the other 40% is
diversified among bonds, commodities and currencies. The first portfolio
carries just one risk and that’s market risk. The second portfolio
spreads the risk across the spectrum.
Exchange Traded Funds
Prior to just a few years ago,
access to the commodity market was limited. The advent of ETFs (exchange
traded funds) makes access to this asset class easier than ever. The
models that I follow are showing that now is a pretty good time to be
invested in this class.
Protective Puts
Another strategy appropriate for
this market is to have an insurance policy on their portfolio. Do you
own a house? How about a car? How about jewelry? What percentage of your
net worth is represented by your house, car and jewelry?
If I had to guess, you probably have
an insurance policy on all three of these assets yet most folks don’t
think about insuring their investments.
Through the use of put options or
puts, you can insure all or part of your portfolio. A car insurance
policy allows you to transfer the risk if you crash your car to the
insurance company. For that ability, you have to pay a premium every six
months. It works the exact same way in the stock market.
If you are concerned about the whole
portfolio or a particular position, you can transfer that risk to
someone else by purchasing an insurance policy with a specific
expiration date. While the downside risk is transferred, we retain
upside potential.
Inverse Funds
Remember when you were a kid and you
went out to the playground and got on the see-saw? If you were playing
with a kid older and bigger than you, the see-saw would send you
straight up in the air and while he ended up on the ground. If the two
of you were of more equal size, that see-saw could suspend itself in mid
air. If you think about your portfolio as being long equities on one
side, you can purchase investment vehicles, inverse funds that do the
exact opposite, go short. Depending upon what you want the relationship
to be, you can purchase inverse funds to lock a certain amount of your
portfolio into an equilibrium position.
The above are strategies are just a
couple that I have in my arsenal to help me manage my risk. Depending
upon your goals, investment temperament, investment horizons and other
factors, any one or a combination of these tools could make sense for
you.
That’s about it for now. If you have
any questions regarding these strategies, or any other strategies for
that matter, feel free to email me and I’ll be happy to respond.
RA Christy
The Stock Trading
Advisor
P.S. Please fee
free to forward this to your peers, friends and associates you think
would benefit from its contents. They will thank you for it - and so
will I!
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R. A. Christy is a professional stock
trader, money manager and author. Mr. Christy is the President CEO of
Christy Investment Group, Ltd., a registered investment advisory firm.
He is also the Managing Partner and Portfolio Manager of Plato Advisors,
LLC. At the time of publication, Mr. Christy may from time to time write
about stocks in which he, Christy Investment Group Ltd or Plato Advisors
LLC has a position. In such cases, appropriate disclosure is made.
Under no circumstances does the information in this column represent a
specific recommendation to buy or sell stocks. Mr. Christy appreciates
your feedback and invites you to send it to
rac@christyinvestments.com.
The Stock Trading Advisor
c/o Christy Investment Group
P.O. Box 625
Alpharetta, GA 30009-0625
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© Copyright 2008 RA Christy
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