The DOT COM run was interesting but it really does pale in comparison to the past 18 months. All major indexes have recovered ground since the financial meltdown with the Dow Jones Industrials crossing the “psychological” 10K mark for the first time in about a year. While still 30% off its historical high in 2007, the major index is certainly showing resilience form its recent low earlier this year under 7,000.
Most economists suggest that the recession is easing and the market has these positive sentiments baked into the numbers already. Is it too much to ask for continued growth in the market? Probably.
The weakening dollar has not produced the export gains hoped for. Further, money policy will ultimately tighten next year while the federal debt figures put tremendous inflationary pressure on the system.
I’m not counting on any further upward momentum. However, I’m still holding most of my equities and remain fully vested. I’m watching DOW but continue to like the company’s near term prospects. I’m also watching ARLP which doesn’t appear to be boosted much since the current Administration won’t get on the clean coal bandwagon. But the rest of the Johnson stash appears solid for a longer term: FRO, VFC, SFL, MCGC, CHKE, etc.
So how does one make money in a flat (albeit choppy) market? Back to basics are my strategy and I’m expecting 15% annually in a flat to down market while maintaining opportunities for a rising market if I’m wrong.
First, watch the fundamentals and dollar cost average into strong equities. This move alone, should have returned all the losses from last year and then some if you can control your nerves. Take MCGC as an example, I was buying this stock at $14 a while back. It then proceeded to nose dive to 75 cents. Reading the companies corporate reports would have shown a healthy, albeit strained, balance sheet. I accumulated the shares up to about $2.00 ultimately increasing my position by a multiple of four. With a cost basis under $2.00 at that point, I’m happy to say the stock appears on its way over the $5.00 mark in the next few months. A similar story can be found with Dow Chemical where a nervous market put so much pressure on the stock price that it was hard not to throw excessive cash at the shares when it was under $10. Keep a watchful eye on the fundamentals and opportunities will always surface.
Second, it’s time to break out the old covered call trick. For any new readers, this involves the sale of a Call Option on a holding you think is done rising for a while or you want to start divesting a bit. For example, DOW has had a good run recently is probably due for a breather. If you can trade options in your account, a possible play might look like this:
- Suppose you own 1,000 shares of DOW and the current price is trading at $27.00 and you wouldn’t mind getting out of the stock at $29.00 in the next month if possible
- DOW provides Call Options for a $29.00 strike price that expire on 11/20/09 for about $1.00
- You could sell short 10 contracts of NZAKC for about $1.00 per share (i.e. – your broker will let you sell contracts against your shares for $100 per hundred shares which would pay you $1,000 on your $27,000 in stock)
- If the stock rises to $29.00 before 11/20/09 you get to keep the $1,000 but you have to sell the stock at $29.00 for an additional $2,000 profit on your current holdings (that’s more than 10% profit on your current position if you are exercised)
- If the stock does not rise to $29.00 you simply keep the $1,000 return and continue holding your stock for future gains
Some people can’t stomach the thought of fixing a price on their stock holdings in a bullish market but the secret to investing is profitable trades not wishful thinking.
Third, and finally, I always keep an eye open for various arbitrage or market fluctuations that look profitable in the short term. I’ve had only a few losers in my years of trading these opportunities and find down markets to be more fruitful than up markets. Regardless, I just wrapped my CYCL trade with a 10% return in about 90 days. I don’t have any ripe fruit at the moment, but I am monitoring a little pharma trade on a company with ticker TRMS. They are being bought by a Korean firm for $3.60 in cash. Nothing appears in the way but the deal was only announced two weeks ago and I expect a little profit taking in the meantime. If the stock drops under $3.30 I’ll probably grab a few shares hoping for a December close at $3.60. Such an opportunity would yield about 8% in approximately 60 days regardless of the broader market direction. Not too shabby…
I’m expecting a dull holiday retail season but still like the prospects for VFC and CHKE since retail will ultimately recover faster than other sectors when cash starts to move around some more. In the meantime, I may run to Target and buy a shirt or two to keep those license dollars flowing to CHKE. After all, Christmas is approaching ;)
