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With the Middle East turmoil, potentially-unsustainable oil and commodity prices, and emerging market weakness, it is very important (and crucial for your portfolio) to maintain a very cautious investment outlook at this juncture.

Considering the 100% run-up in the S&P 500 since the 2009 lows as well as the correction many investors have all been waiting for, the risk of a market downturn is not something to be ignored. We therefore recommend not only being extremely selective with which stocks to invest in, but also to protect your positions through hedging, pairing or options. Our strategy at this point is to buy those few companies and stocks we like - and buy them near low-risk areas of support - while protecting our long exposure to the market by either shorting stocks we don't like or through various options strategies.

Here are the themes we are playing and the way we are doing so:

Invest in Favorite Stocks Near Support

Today we initiated long positions in Albany Molecular Research (NASDAQ:AMRI), Ariad Pharmaceuticals (NASDAQ:ARIA), Biodel (NASDAQ:BIOD), Natural Gas (NYSEARCA:GAZ), Silicon Image (NASDAQ:SIMG), and Trimeris (NASDAQ:TRMS) through long stock positions.

Our reasoning is as follows:

AMRI has been heavily battered over the past few months. We have been patiently waiting for an entry point. On February 25th, AMRI developed a "bullish engulfing" candle pattern that has set our exit level at $4.20-4.25. With the stock selling for $4.50 today, the 25 cent risk (about 5.5%) is pretty good in our opinion.

ARIA has been one of our favorite biotech plays, especially since it involves cancer research and medication. We've liked it since around two or three dollars, so the recent pullback from over $7 to a little under $6 today is a good entry point. With the bottom of the recent gap up at $5.50, our entry point today is also one of low risk. With our exit point at $5.60, and a risk of 30 cents (or about 5%), this was a great time to enter.

BIOD has also been a battered stock this year, falling from $6 to below $2 in less than three months. We like the value and the 20% short interest (which adds to the short-squeeze possibility).

GAZ is our low-risk energy play. While oil has been skyrocketing due to the Middle East shocks, natural gas has been stagnant. Though many obstacles stand in the way of natural gas fundamentals, such as a very high supply, we do think that GAZ stands to gain with continued high oil prices. And with near-term support around $6.90, our entry point at $7.08 is one of low risk.

SIMG is our favorite small-cap technology play. We've been in and out of it since below $3, and it has run up to above $9 recently. After pulling back to near $8 though, and finding support at the recent gap-up, we bought it today. Watch for it to stay above $7.50.

TRMS is a very small-cap company with great fundamentals. One of our favorite buying points about this company is that it currently has a $57 million market cap, but has $44 million in cash. That means you get nearly $2 cash per share on a $2.56 stock. Add to that the zero debt on the balance sheet and the fact that this is a hedge-fund favorite, and TRMS looks really good at these levels.

Protect Positions Through Hedging, Pairing and Options

In order to protect our portfolio from exposure to the developing risks in the market, we're picking some battles with stocks and themes we think are overextended.

Here are our current options plays:

Short emerging markets - Since emerging markets have been lagging since late 2010, and China is showing growing weakness (by lowering growth forecasts as well as increasing interest rates), we initiated positions in Triple-Leveraged Emerging Markets short positions through EDZ call options. Any weakness in emerging markets will not only protect our portfolio, but will provide us with a very nice profit (since EDZ pays out three times the actual move in emerging markets).

Short agriculture - As agriculture continues to be one of the top themes of the past few months, we believe the move has been over-extended and at great risk of at least a correction. True, worldwide demand has grown tremendously for food and grains. But with many countries trying to slow inflation and control their consumption, the ag plays may take a breather here. Either way, we are hedging our bets through MOO put options. We may also initiate positions in DBA.

Short small-cap stocks - If the market falls, we can expect small-cap stocks to get hit harder than many of the large-caps. And rather than betting on specific names in protecting our portfolio, we prefer to protect ourselves through a broad options play on the Russell 2000 (NYSEARCA:IWM). We therefore have bought call options in the triple-short small-cap (NYSEARCA:TZA). If a market drop ensues, TZA will provide us with some nice returns.

Long housing - One of the most beaten-up sectors, and perhaps rightfully so, the housing sector (NYSEARCA:XHB) provides some of the lowest-risk plays if the market continues to run up. Our favorite play in housing is Hovnanian (NYSE:HOV). With very strong support levels at around $3.50-4.00, as well as a 35% short interest, HOV may provide a great payout if earnings are respectable. We're currently long HOV calls.

As you can see, we're carefully picking our stocks while protecting ourselves through broad and leveraged options plays. At a time like this, it pays to manage risk and hedge your bets. We recommend avoiding very large positions until some clarity comes back to the markets.

Source: Our Investor Outlook: Cautious and Protected

Additional disclosure: We are also Long EDZ, TZA and HOV calls. We are long MOO puts.