Are we having fun yet? These last few weeks have been about as difficult a period as I can remember for trying to make money in the stock market, whether your view is short or long term. Nothing much has been working. Even the energy stocks have been weak. They never fully reflected the spike in the price of crude but despite that they were hammered when oil prices retreated last week. Overall, the S&P/TSX Capped Energy Index is off 17.1% so far in July.
The good news is that we did see a modest rally in the financials sector for the first time in weeks, with the S&P/TSX Capped Financials Index advancing 10.35% in the final three trading sessions of the week. It's still down by 7.8% for July, however.
So what should we be doing now? I decided a strategic overview would be useful to IWB members along with a review of some past recommendations with the primary objective of raising cash. I have been using these strategies myself in an effort to protect capital and position my portfolio for (hopefully) better times ahead.
Raise cash. Reduce or sell some of your bigger gainers and losing stocks that are unlikely to rebound any time soon. I'm not suggesting a fire sale but when we get a rally consider selling into it and increasing your cash position to 25%.
Hedge your energy position. I am still net long energy but I have been reducing my positions in energy-related stocks and have bought the ProShares Ultra Short Oil and Gas ETF (DUG) to 15% of my energy position. Once we get through hurricane season, I will likely increase that to 25%.
Hedge your basic materials positions. If you have been following our advice on basic materials stocks like Potash Corp. (POT), Agrium (AGU), or Monsanto (MON) you have done well. You may want to consider hedging your positions with the ProShares Ultra Short Basic Materials ETF (SMN) that covers companies such as Monsanto, Dow Chemicals (DOW), and Nucor (NUE). This is not as pure a play as DUG but it is a useful hedge.
Start rotating into health care. This sector has been pretty badly beaten up and should be ready to turn. I like Johnson & Johnson (JNJ), Gilead Sciences (GILD), WellPoint (WLP), and United Health (UNH). These are not formal recommendations, only suggestions that you may want to look at.
Start buying financials. I said several months ago that I would alert you to the buying opportunity on financials when the time was right. Well, I think that the time has come to start dipping your toe in the water, and I mean exactly that. Move slowly. Don't build your whole position now; just start the process of adding to your financials weighting over the next couple of months.
Individual names I like are Wells Fargo (WFC), US Bancorp (USB), Toronto Dominion (TD), and Bank of America (BAC). I think this is an historic opportunity to buy these names with a two-year view. Again, these are not formal recommendations. But I do have one for you: ProShares Ultra Financial ETF (UYG). Details follow.
So that's my five-point plan to make it through the next few months. If we do get a short-term rally in the Dow and the S&P, be prepared to hedge your portfolio with either the ProShares Short Dow 30 ETF (DOG) or the ProShares Short S&P 500 ETF (SH).
Stock Position: Long.