Time To Take Some Chips Off The Table

Includes: QQQ, SH, SPY, VXX
by: Keith Springer


Market overbought and needs time to consolidate.

Why we will have no inflation for many years.

A strategy for Investors.

Nothing feels better or easier, for that matter, than being invested in stocks when they are going up. The problem arises, however, when the market decides to take one of those classic corrections it does every year or two. When we get those, we get a little anxious wondering if this is the big one and start second guessing ourselves. The real problem is when we get one of those calamities that shaves off 30%, 40% or 50%. Given the risks coupled with the dog days of summer, it's time to take some chips off the table.

Although I'm only expecting a modest correction after earnings with a strong fourth quarter, we must all be conscious of those big drops that used to take decades to re-occur but occur now much more frequently. However, when you have an economy such as we have now where the demographics are heavily against us, as I discuss in Facing Goliath - How To Triumph In The Dangerous Market Ahead, the response is either to let the free market economy settle where it should or to manipulate it through economic stimulus and quantitative easing. The first is more painful up front but takes a fraction of the time. The latter delays the curing by creating bubble after bubble.

The latter is where we are now and have been since the demographics started turning down in the late 90s. Since then we have had stock market crashes in 1998, 2003 and 2008, all created from Fed bubbles.

The issue is that an economy needs spenders to grow. Statistically, people spend the most from about 33 to 48. When you have an aging population that cannot consume what its previous generation did, the economy shrinks. The baby boomers were 90 million strong, followed by the GenXers who are only 65 million in size.

The Fed can fight it for a while, but eventually the mountain becomes too high to climb. That's why we've seen trillions of dollars in stimulus and increased debt, but an economy that is just limping along. On the plus side that is also why we've seen no inflation and will not for many years.

Are we in another bubble? You bet we are. Unfortunately there is no whistle that blows when a top is formed, but you can hear the winds in the distance.

Investor Strategy

With the market desperately needing some time at the beach to consolidate its gains and the summer doldrums of August on our doorstep, the risk for being all in is just too high. Nimble traders can ride the earnings train for a few more weeks in strong growth names like Apple (NASDAQ:AAPL), which you can buy on any downturn as its new products are sure to amaze; Microsoft (NASDAQ:MSFT), which is the staple for every computer made; Intel (NASDAQ:INTC) which is enjoying a major multi-year breakout, Google (GOOG, GOOGL), whose earnings were once again in the stratosphere; Netflix (NASDAQ:NFLX), which is revolutionizing media delivery and will have the earnings to prove it, Facebook (NASDAQ:FB), a social media staple and is winning over the older crowd - the very people with money and who will not be upset by the company's ads. Or simply buy the market ETFs like QQQ and SPY. After earnings season, aggressive traders should be out of these names and/or hedging with Proshares Short S&P 500 (NYSEARCA:SH) or the iPath S&P 500 VIX short-term (NYSEARCA:VXX).

Of course the key for investors is to always take just the least amount of risk than you absolutely have to in order to get the returns that you need to achieve your goals. Most people don't know how to calculate their risk or optimize their portfolio or how to build a portfolio that gets the best returns with the least risk possible. Go see your qualified retirement advisor and have them perform a Retired Income and Tax Strategy Analysis as well as a Stress-Test on your portfolio so you can see how your investments will perform in any market that comes our way so you don't get crushed in the next inevitable crash or correction.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.