I hope to see some of you there, because the clock is ticking...
The Federal Reserve's next policy meeting starts September 21, right after the event. The meeting was only supposed to last a day, but with poor economic news still piling up, the Fed announced its meeting will last two days.
Front and center will be talk of the Fed's next move to prop up the economy.
It "worked" last time, so why not another round of government bond buying?
I used quotes because the Fed's $600 billion debt buying program led to a 28% rally in the stock market. But without the firm foundation of a stable economy, the bottom is already starting to drop out from under the market.
Friday, the Dow closed down 2.69%. The S&P 500 dropped 2.67%, and the Nasdaq fell 2.42%.
Since the Fed's bond buying program ended in June, this is how the market has performed:
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The major indexes are down between 7% and 11%.
Last Thursday, I talked to you about a charting technique that is predicting a big rally before the end of the year. If that coincides with another round of debt buying, you need to protect every bullish move you make.
We've given you no shortage of ideas.
Zachary Scheidt, editor of New Growth Investor, showed you how covered calls can protect your profits and give you additional income.
In our Smart Investment Strategies edition from July 20, Zach said:
Covered call positions were some of our best moneymakers at the long/short fund I managed. We would typically buy a few thousand shares of different stocks that we believed had a good chance of trading higher (or at least not trading lower), and then we would sell covered calls against that stock.
Over a period of two months, a typical call option will give you only a modest percentage return. For instance, if you were to buy Allied Nevada Gold Corp. (ANV:NYSE) today at $40, and sell the $40 calls at $3, you would be locking in a 7.5% return over the next 60 days. That sounds a bit boring, right?
But what if you could generate 7.5% during every 60-day period over the course of a year? The compound annual returns would add up to 54%! And this is in a stock portfolio that actually holds less risk than a typical account that doesn't use covered calls.
The covered call strategy is used by major hedge funds and other Wall Street institutions, but that doesn't mean individual investors can't get in on the action. Zach says, "These hedge fund tools offer plenty of ways for investors to cut back on their risk, add to returns, and create a stockpile of wealth — even in a turbulent market!"
We've been harping and harping on this form of protection. We hope you've been listening. This chart says it all.
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This is the SPDR Gold Shares ETF (GLD), the iShares Silver Trust (SLV), and the iPath Platinum ETN (PGM).
Precious metals will continue to be an important protection tool against market downturns. If you're not holding any in your portfolio, consider adding some on price dips. If we do get a market rally toward the end of the year, we could see gold, silver and platinum prices come back out of the clouds.
That might be a great buying opportunity — for profits as well as protection.
In August, Justice Litle, editor of Macro Trader, told you about portfolio "insurance." Specifically, Justice showed you how to use inverse ETFs. "Utilized properly," he said, "portfolio insurance doesn't create catastrophe. It prevents it."
Here's what he means:
Inverse ETFs are designed to rise in value when an index or a sector declines. There are a wide variety of inverse ETFs, covering everything from sectors and indexes to commodities and even currencies.
Three quick advantages of the inverse ETF are (1) you can purchase them in a retirement account, (2) you can buy quickly, and (3) there is no direct exposure to time decay as with options.
For example, if you find that you have a lot of big-name, blue chip companies from the Dow in your portfolio, take a look at the ProShares UltraShort Dow 30 ETF (DXD). This ETF moves twice as much as the Dow — in the opposite direction. On Friday, when the Dow dropped 2.69%, this ETF climbed 5.37%.
Keep a Close Eye on the Markets
Now that you have three different portfolio protection tools to add to your arsenal, keep a close eye on the markets... particularly after the Federal Reserve meets next week. Don't make any bullish moves without protection.
A rally could be in the mix over the next couple of months, but it could be nothing more than an over-inflated balloon. When it bursts, those unprotected could see massive losses in their portfolios.