Tapping on the Brakes
After several sessions of declines, the market staged a one-day "risk on" rally on Wednesday. It did this despite a poor August durables report and a downward revision to second-quarter GDP to an anemic 1.3%. I believe we are heading for more turbulent times in the markets over the next six months and I established some new short positions (through bear market call option spreads) to offset my overall long portfolio as the rally started to fade late in the day. I employ these short positions when I think the next six months will be either flat or down in the overall market -- as I do now. They tend to act as brakes when the market is climbing, but lessen the volatility of my overall portfolio as they tend to pay off in a significant way when the market falls or flat lines.
The reasons I think the market volatility is going to increase in the short term have been much discussed -- the fiscal cliff, falling S&P earnings in third quarter, the U.S. presidential election, the ineffectiveness of QE3, European woes, etc. -- so I will not get into further detail on each of the possible events that could cause turbulence in the market over the coming months. Following up on my Tuesday column on how to use quarter-end window dressing to your advantage, here are two stocks that had stellar third-quarter performance but have stretched valuations currently. Both of these names could hit harder times in the fourth quarter and make good short candidates for aggressive investors. Other investors should avoid these shares until they have significant selloffs or until fundamentals catch up to their stock prices....278 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.
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