Sometimes you have to take your lumps when markets turn on you. Retaining capital in a bear market can mean you’ll need to 86 your worst losers.
WASHINGTON, February 8, 2016 – It’s just past the noon hour Monday as we write this latest installment on bear market tactics. The Dow is trying to recover a few points right now after having been off nearly 400 points earlier today. Pretty dismal stuff. While a nifty dead-cat bounce might be in the offing soon, this may mark only a pause in the downdraft, which will continue until the selling is exhausted.
Exhaustion is approaching in some sectors. But then again, something, somewhere is inducing HFT machine traders to continue 2016’s waterfall decline, which, to modify a line from our favorite sage, Yogi Berra, isn’t goanna be over ‘til it’s over.
That said, when you see near 50 percent losses in respectable stocks like LinkedIn (symbol: LNKD) – which dove roughly that far on Friday – you have to consider taking your lumps and getting out at least for a while.
Very often, after a short optimistic bounce, such stocks will continue to decline, and you’re best out of them at least until the smoke clears. That’s because a badly-damaged stock tends to stay badly damaged for a considerable amount of time. Meanwhile, you can make more money and/or more dividends elsewhere. Or at least staunch the bleeding in that part of your portfolio.
Generally, the Maven will dump a stock in one of his portfolios if it exceeds a negative 5 percent on the downside in a bull market or a negative 8 percent on the downside in a bear market. These numbers are somewhat arbitrary. But it’s necessary when you invest to set not only an upside target (if your swell idea works) or a downside stop loss (if it doesn’t).
Otherwise, you’ll keep telling yourself, as many investors do, “It’ll go back up soon.” Problem is, when you find yourself saying this, fate tends to assure that it will never go back up. At least not within a rational time period, but often not at all. So dump it. Now. If it exceeds your downside target.
In keeping with this philosophy, painful though it might be, here are areas the Maven believes are strongly suggesting a quick exit, at least for now. Think of this not as investing but as portfolio triage.
What to dump right now:
This list is pretty simple.
Biotech and most tech. As we learned Friday from LinkedIn, stocks in these high-growth sectors aren’t likely to resume their much desired high-growth profiles anytime soon. Sometimes, corporate management has even told us so. A
s the current market nastiness seems to be predicting something like “Son of Great Recession,” most of the overpriced stocks in this sector, selling at astronomical and borderline asinine price earnings multiples, could be doomed at least in the short term. If people are strapped for cash these days—which, in general, they are if they’re not part of the 1%—they’re not going to be buying much that isn’t food, shelter or heating and cooling. Simple as that.
Tech and biotech markets and products have long been ridiculously overbought and need a dose of fiscal reality, which Friday’s trade started giving to them good and hard. This was bound to happen at some point. That point is now, and it’s happening very fast. Generally, you should lighten up on what you have at least for now. You can get it back on sale later if you wish and start all over again. Stocks in this area aren’t necessarily bad stocks. They’re just bad right now.
Tech, BTW, includes the allied areas of software and networking. Just stay away for now. People are getting killed. Opportunities will arise later. Wait for them.
Healthcare and Big Pharma. Lighten up on these. Same reasoning behind our general dumping of tech.
Tech and pharm will continue to make good money, particularly due to the captive Obamacare market. But during Election 2016, they’ve become a big headline risk for an ironic reason. It was healthcare sector companies, particularly Big Pharma, that initially colluded with Obama and the Democrats to stuff Obamacare down unwilling American throats. Now these companies are going to learn why they should never do or have done business with an essentially communist government like this one.
Don’t laugh. Once these implacable lefty politicians get what they want—with your help—they don’t need you anymore. It’s at this point that they will turn on you and your company like they turn on everyone else who’s not them. Remember what Lenin said about capitalists happily selling the rope to the people who will hang them with it.
Right now, both Bernie and Her Hillariness are casting the evil eye on healthcare and Big Pharma. Both sectors and their corporate Pooh-Bahs should be afraid. VERY afraid. You should, too. Stay out for now.
Hedging. aka, Portfolio Triage
If you still like some of your holdings and want to protect them, you can hedge your portfolio with options and short ETFs. They will go up as your favored stocks go down, protecting to some extent the stocks’ current pricing. This strategy never works precisely, but it’s a defense against taking a hit on stocks you still want to hold, like high-dividend paying stocks.
We won’t get into options right now because most general readers don’t understand them. But you can protect your remaining stock holdings by buying “insurance” on them, in the form of puts; or collect some income even if your stocks are going down by writing covered calls against those stocks. (We’ll explain this stuff in a future column because it’s a little complicated.)
However, you can still protect somewhat against the downside by accumulating shares of the short S&P 500 ETF that trades under the symbol SH; or double your protection (and, unfortunately your risk) by buying some of the double-short (2x short) S&P 500 ETF, symbol SDS. There are a couple of other useful ETFs as well, but we won’t even mention them here. They’re volatile in the extreme and dangerous to use unless you’re a professional trader sitting by your machine all day, as the Maven pretty much does.
Be careful with all hedges, including the two ETFs we’ve mentioned. Don’t even think about doing this if you are not an experienced investor. If that’s your situation, perhaps it’s best to forget hedging right now and stay mostly in cash or cash-equivalents like money market funds and short-term CDs.
Yes, we hate those low-yielding investments, too. But how much money did you make on LinkedIn, Apple or Netflix last week? In a violent and bearish stock market such as the one we’re in right now, it’s better to stay in cash than to bet on a horse that’s almost certain to lose.Click here for reuse options!
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