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There’s a couple of topics I’d like to briefly cover today. The first hails from the “I told ‘ya so” department and the second tries to answer the “Now what?” question.

1. A SKIL-ful illustration of misplaced hope
And yet another example of “How to lose money in the market” (see 2/19/10 & 3/9/10 blogs), takeover candidate SkillSoft (SKIL) yesterday dropped 5% because no higher bidder stepped up during it’s “Go Shop” period despite the fact that it was presented to 45 potential acquirers (click on chart to enlarge). Now it appears that the original deal with private equity will proceed at the previously offered bid of $10.80 per share.

Moral of the story: Hope is not an investment plan!

SKIL Chart 3-11-10

(click to enlarge)

2. The market is continuing to advance…what should I do?
The following indices have recently made new highs: Dow Transports (DTX), Nasdaq Composite (typically denoted by COMPX), Russell 1000 (RUI), and the Russell 2000 (RUT). Of these, the Dow Transports are typically viewed as a leading indicator of market movement, and the indication is that it’s heading higher.

The big question now is this: How can one take advantage of this rally in the face of less than propitious economic indicators?

To answer this question, here are a few suggested plays depending on your risk tolerance and trading expertise.

Conservative plays
Conservative investors should consider adding to their buy lists. Now would be a good time to capture dividend-paying stocks in sectors that still have significant upside potential. Although regional banks (KBE, KRE, XLF), insurance (NYSEARCA:KIE), and defense companies (NYSEARCA:PPA) have enjoyed a nice rise, they’re still a long way from their peak values. Another tasty feature is that they all have just recently broken resistance and stand to rally a lot further. The cherry on top is that they pay a dividend, albeit a small one (1% – 2% dividend yields).

One way to take advantage of this situation is to check out the major holdings of the sector ETFs to find specific value plays. Perusing the top ten holdings in each one, I like the following stocks for their combination of dividend yield (D/Y) and growth potential (based on technicals):

KBE: M&T Bankcorp (MTB), 3.5% D/Y; BB&T (NYSE:BBT), 2% D/Y
KRE: CVB Financial (NASDAQ:FFBC), 2% D/Y
XLF: There wasn’t much to shout about here except for the Bank of NY Mellon (NYSE:BK). It’s been channeling between $26 and $31 and as such would make a good covered call candidate near the top of its range.
KIE: This group has been especially beaten down and the charts of its top 10 candidates look pretty good. Their dividend yields are also higher than the others, on average. My picks of the group are the following: Allstate (NYSE:ALL), D/Y 2.5%; Aflac (NYSE:AFL), D/Y 2.1%, Metlife (NYSE:MET), D/Y 1.8%.
PPA: There’s a lot to like in this group, especially: Lockheed-Martin (NYSE:LMT), D/Y 3%; Goodrich (NYSE:GR), D/Y 1.5%; Honeywell (NYSE:HON), D/Y 2.8%; Boeing (NYSE:BA), D/Y 2.4%.

Note that many of the above picks would make good covered call candidates (discussed further below).

KBE Chart 3-11-10

(click to enlarge)

Since volatility as measured by the VIX is at a relative low, now is the time to pick up some cheap portfolio insurance. Here, being selective pays. If your portfolio is tech-heavy, buy put options on the Q’s (QQQQ); if it’s weighted towards only a few specific sectors, considering buying puts on the corresponding ETFs.

Mad money plays
Those with more tolerance to risk should consider playing the market to the upside.
Index ETFs (SPY, DIA, QQQQ, etc.) offer fairly conservative exposure to upward momentum.

Riskier plays include the 2x and 3x ETFs; the QLD and the TQQQ are examples of double long and triple long Q-based ETFs. Options players may find call debit spreads to be attractive. Front-month put credit spreads can also bring in cash (at the expense of margin), but remember that this is a very fragile recovery and the market could move against you at any moment. I’d prefer to sell out-of-the-money bull-put spreads during a market retracement, not during a rally, and then I’d only take half positions, at least until economic factors (housing, employment) begin to firm up.

Considering that this market’s recovery will probably be slower rather than faster, covered calls might be an ideal way to generate income especially in retirement accounts. Best-of-breed stocks in rising sectors with liquid options is a winning recipe.

Bon appetit!

Source: Market Potpourri: I Told You So and Now What