Five Ways to Take Advantage of a Market Correction

Includes: HXM, NRG, RHDC, TGB
by: Morgan Martindell

For some time now, pundits have been anticipating a market correction. As the economy continues to slow at a controlled pace, the likelihood of a correction increases with each up tick in the indices. However, due to the controlled nature of economic cooling and high likelihood of a soft landing, such a correction is likely to be measured and followed by more gains. Historically, corrections of this nature -- pauses in long term bull markets -- generally last between two to four months. After this short period of decline, stocks will likely move higher as investors focus on the immense upside to globalization.

However, because of unprecedented levels of liquidity, a lack of business investment that has pushed profits to record levels, and because the market is a fickle beast, the expectations of bearish pundits have hitherto been disappointed. While expectations of a correction are justified, timing the top is difficult, so it is best to take an investment approach that can be successful whether the market experiences a correction or not. With this in mind, I have devised an investment strategy that accounts for the high likelihood of a correction while at the same time capitalizing on further upside opportunities in the markets.

I plan to take advantage of the market conditions outlined above as follows:

  • Invest conservatively, to the exclusion of stocks whose performance depends on the successful execution of a very aggressive growth strategy.
  • Invest primarily in stocks that are not dependent on the American market. Two of this sort in which I am currently considering investing are a Mexican homebuilder, Homex Development Corp. (NYSE:HXM), and a copper miner, Taseko Mines (NYSEMKT:TGB).
  • Hedge against a market decline by buying puts on companies I believe to be extraordinarily overvalued. Two of these in which I'm currently considering investing are an advertising firm primarily in the print ad business, R. H. Donnelly (RHD) and an electric company, Reliant Energy (RRI).
  • Focus on rapidly growing industries and industries benefited by long term shifts in global economics. A few examples of rapidly growing industries are uranium miners, molybdenum miners, demand response electricity management companies, and many others. A couple industries that will reap the benefits of long term shifts in global economics over the next few years are crude oil producers, and industrial metals.
  • Finally, given the dire need to find a powerful alternative energy solution I'm always looking for viable energy alternatives. Many of the hottest industries over the last few years have been alternative energy crazes, and the short term bubble this often produces, independent of long term viability, can also be a highly profitable area of focus, and I intend to fully capitalize on this opportunity. Ethanol is the most spectacular recent example of this phenomenon.
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