Guest Author - Guido Deboeck

No one likes wakeup calls! What we got this week in the markets was however just that. On Tuesday rumors in Shanghai about the Government imposing a 20% capital gains tax, the possible resignation of the commissioner of the Chinese Securities Regulatory Commission and a few others, caused a sell off of about 10% in Shanghai stockmarket. This carried first over to Europe and later to the major US markets. They dropped 3 to 5% that day. Wednesday we experienced a slight rebound of just fractions of a percent, Thursday the volume came down and today…we are experiencing another down draft of about 1% (0.84% in the S&P and 1.28% in the NASDAQ as off 1:46 pm).

For the week the Dow lost 3.4%, the S&P 3.57% and the NASDAQ 4.78% (based on midday estimates). Maybe you find comfort in the fact that Europe lost 5.2% and Emerging markets lost 8.5%.

In my article posted on Tuesday I suggested that you do not panic, stay alert and that you take cool headed decisions on what holdings to sell and what holdings to hold. Whatever holdings you had that had negative returns should have been sold! Holdings that have huge unrealized gains could potentially be kept to weather the storm (i.e. live through this correction). All depends how much risk you are willing to take! Think: if the market were to correct by 10 or 20% would I still want to be holding those assets?

Let there be no mistake: the market direction has turned and the best investment strategy is be defensive. You may want to reread my eralier articles about “when the market holds the ball, you play defensively!”

What does that mean? First, holding cash is definitely a defensive play. Rest assured, there is nothing wrong by holding cash for a couple of weeks or even months while this correction plays out. Second, you may consider investing in Treasuries or ETFs, exchange traded funds based on bond indices. For example, SHY for shortterm securities, IEF for 7-10 year securities or TLT for 20 year securities. Third, if you prefer to stick to stocks you may consider utilities or ETFs that trade utilities, e.g. UTH. IDU, XLU.

If you are quite experienced you may want to try selling short, that is sell securities that are borrowed, speculating on a price drop, and later buy them back (hence you sell short first and buy to cover later). Someone said recently: you may as well recognize it that we are in a correction... so saddle up and ride it! Caveat to this is selling short requires timing the market right which is even more difficult in a down markets than in markets trending up. Those who want to try this should study (and I mean study), the excellent work of William O’Neil: “How to make money selling stocks short” Don’t sell short before you read his book.

What more is there to say? Do not belief for a moment that good fundamentals are important for deciding what to sell, what to hold. The economy is still in good shape, growth droped to 2-2.5%, inflation remains modest but does that help you preserve your assets ? When the trend is down you need to protect your assets, preserve capital. If you do this, when the market turns around again – because it always does – you will be ready to benefit from new opportunities to make money.

All of this to simply say: WAKE UP, the market turned around; take action don’t procrastinate, keep cool, make sound decisions; protect your hard earned assets.

Stay tuned to this channel.

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