October is here. Halloween and heightened stock market volatility are just around the corner. We have the ongoing debate over the budget, as the government was shut down yesterday, halting non-essential services.
There's also the upcoming third-quarter earnings season this month. (Read "How Easy Money Is Hiding the Real Problems in North America.") As I have said in previous commentaries, I'm not that positive about third-quarter revenue growth.
The S&P 500 and Dow Jones Industrial Average are down over two percent from their October 18 record-highs and could likely head lower on the charts. With the key stock indices up over 20% this year, you know that the fourth quarter will bring surprises and volatility to the stock market.
This is not a stock market to just watch and wait for things to happen. You need to be proactive in your investment strategy and make sure your capital is protected for the future.
So here's what to do.
If you don't like volatility, then you may want to cash out. While you maybe made some decent gains, when you have enough and are happy with your gains, then exiting the stock market makes perfect sense. Having excess investable cash would be welcomed if the stock market corrected.
In my view, the upside potential for the fourth quarter will likely be less than five percent. Of course, this is a rough estimate, but in my view, the downside risk in the stock market is higher based on the host of market uncertainties not only domestically but in Europe and China as well.
If you are sitting on the fence, not knowing which way to go, consider sitting on the sidelines and waiting for a possible stock market correction to re-enter and add to positions instead.
If you are familiar with stock market options, you could add put options to protect against downside weakness in your stocks or a segment of the stock market. The cost is what you paid or the premium for the option.
You can also add call options if you are weary of chasing stocks but at the same time don't want to lose out if the market edges to new record-highs. The use of call options is manageable in the total maximum risk, but they allow you to take advantage of any upward moves in the market.
While there are many factors to consider heading into the fourth quarter, just be proactive in your investment strategy.