The market has been sputtering a little bit lately after having a significant run to five year highs in the DOW. Is the drive simply overly driven by investors jumping on the band wagon and buying high, expecting the run to perpetuate indefinitely? Possibly, since the run up is not supported by profits or a strong consumer confidence in the economy.
Another reason for the correction is the market is being supported by the government pumping money into the economy via printing. There is no real growth and therefore, once the printing of american currency stops, the party is over and the hangover kicks in.
So, what are we to do? Should we liquidate all positions and go 100% cash? Not the worst idea in the world, but also not the best idea. One strategy is to get defensive. Companies such as Johnson and Johnson (NYSE:JNJ) has a huge and diverse product line that has very consistent sales in bull and bear markets. The reason is that JNJ sells products that are everyday essentials. Companies like that generally lag the market in good times and beat the market in bad times.
Another way is to take profits, but not liquidate entire positions, and stock pile cash for when the market corrects. When the correction does happen, the correction will be overcorrected, much like the run up is an exaggeration and irrational. When the market drops, most stocks will drop below market value and informed bargain hunters will be able to position themselves for the next run up.
The best way to position yourself is to do your research, have cash on the side and buy into the drop incrementally. The reason for doing this is that no one can accurately predict the bottom of the market. Just know your stocks and have a plan to buy stocks at a certain price and an exit plan as well. If you are long on a company, then you can be a little more liberal on your buying points, as you will simply be building a position, rather than positioning yourself for a trade.
If you are in bonds at all, you've got about 18 months to get out, before the interest rates go through the roof and you get killed. It is going to be a rocky ride, so get ready.