Today, Bulls will tell you that we are at the middle of a strong bull market. They will also argue that the recent rally isn't that "big" because the Dow Jones is only slightly positive in 2009. Whereas Bears will advice you to short the market because the market is overbought and we should see another big drop (or even another strong leg of a long term bear market).
Both of them in fact have no clue about what will happen in the Future, neither do i. I do believe that the only thing that is true is :
- The VIX is a little better now but we are still at a bear market level for the VIX (above 20 means bear market level).
- The Yen is still too strong.
- Volume are still light
- The economy is a little bit better but the situation is still a big mess
- The job market will continue to weaken.
- Most earning beat comes from lower revenue and higher cost cut. It isn't great for the long term prospect of some businesses that usually growth through investment.
So in fact, we are probably in a sideways market that will sometime shoot on the upside or the downside. Nobody really knows.
So base on that, how should we invest in the next couple of month ?
First of all, this crisis should be an amazing opportunity to build a portfolio with strong long term company. It means companies that has great fundamentals over the long term.
After your research, when you pick a stock that you would like to invest and hold for a long term. You should invest with this principle :
- If you think that today this company is a great long term pick, it means that the actual price please you a lot, but it also means that if the stock continue to rise or fall you will still like it because you do believe that there is a big long term upside.
- Therefor, because you don't know how the market will react in the next couple of month, you will apply a major advice from Mister Benjamin Graham : Buy a little bit every month of the company, you will have a very good average price at the end of your purchase program.
- In order to even gain from this purchase program, sell cover put every month at lower strike of the stock you trust. (Cover Put = You have the cash to buy the stock if the actual price fall below the strike price). By applying this strategy, you will have different scenario ahead of you (every scenario will have a good effect on your portfolio) :
=> The stock is above your strike price, you earned the Put premium and if you want you can purchase a small piece of the stock or double your cover put sale for the next month if you feel the market will still fall.
=> The stock is below your strike price, you earned the Put premium and you are still happy to purchase (for the long term) the stock at the strike price of your put minus the premium because you believe there is a big long term upside on the stock.
So to resume, i would advice to buy a little bit every month of company you trust over the long term by selling cover put every month to get in addition the premium of those put.