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Beating The Market With Fundamentally Strong Stocks And Options Trades

Summary

Fundamentally strong stocks beat the averages.

My virtual portfolio has risen in value even in this market.

The market is over-reacting to the tariff news.

OMG, the bottom has fallen out of the market! What should I do?

As of one hour into the session today (April 4), the Dow Jones Industrial Average (DJIA) is down 359 points. I have taken action on three positions in the portfolio.

Why the market decline?

Before explaining today’s portfolio actions, I want to discuss the reason for this market decline. It appears the primary cause is fear over the proposed tariffs by the U.S. on China, and vice versa. These proposed tariffs are draconian, but the market is over-reacting. Why? Because to date, the only event has been in the form of proposals; nothing has really happened.

Tariffs probably won’t go into effect

Everyone should realize that no tariffs have been put in place. All of the tariffs on both sides are proposed and represent a negotiating position. And the U.S. has by far a superior position. China needs to compromise more than we do. The U.S. gross domestic product (NYSEMKT:GDP) is over $18 trillion, versus China’s GDP of $11 trillion (and even that is likely to be exaggerated).

With this in mind, the large drops in the market are creating irrational fears, and if the tariffs eventually disappear due to negotiated adjustments (which we should expect to see eventually), the market will recover and resume its bullish move.

The portfolio is out-performing the market

With all of this fear in the market, I am pleased to report that the majority of equity positions in the virtual portfolio on Thomsett’s Investment Guide (NASDAQ:TIG) have gained value rather than losing. This is the result of the initial selection process, in which stocks were selected based on the fundamentals of the companies, all of which were superior.

Of the 13 stocks, four have declined and two have declined by over 5%. In response to this, I have entered two new risk hedge trades on these two stocks.

The aggressive risk hedge

The hedge involves long-term installment strategies. These are opening a long call or a long put to offset future price movement, and paying for the long options by selling a series of very short-term short options.

The normal installment position involves one long option and a series of single short sales. However, today’s trade is more complex, combining two separate positions to hedge price movement in both directions. The cost of the long options will be paid for over the next 290 days before expiration.

Our portfolio is out-performing market averages. Nine of the 13 positions have gained in price during this down market. Click above to see how you can track the portfolio and learn the risk hedge system.

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