With all of the talk about the economy possibly coming in for a soft landing, I can't help but think of an important component in skydiving; Like most jumps or falls, the severity of the impact depends on whether or not you "Bend You Knee's."
If what we have been experiencing the last 44 months is a cyclical bull rally, then eventually the next leg of the bear market will resume. When it does, the magnitude of the decline, and the severity of the damage in your portfolio will depend on whether or not you are prepared. In essence, will you Bend Your Kneeç´?
Market declines, like skydiving, have a similar feel. Tell me if I am wrong, but not looking at the ground in skydiving, or not having a potential downside target may lead to disorientation. There is nothing more frustrating than being a disoriented investor.
By identifying a downside target, and reinvesting at pre-determined price levels, investors can enjoy the rush of a free fall, and enjoy the scenery on the way down. Eventually, a bear market will end, and a new bull market will take its place.
Here are some thoughts on how we can do this;
I still believe a summer rally is possible. The correction that started in May took the S&P down about 8%, bottoming around the 1220 level. Since no one knows what the markets reaction will be after the Fed meets on June 29th, a rally could carry the S&P up to the 1300-1325, or re-test the 1220 level one more time. Because of this uncertainty, I have labeled investing in this market as "Edge of the Cliff Investing".
For the moment, we remain in "No Man's Land".
Even if we have a summer rally, I still plan to sit out the rally with 50% of my assets in cash or bonds. If the rally is significant, I will probably add to my cash position.
In the meantime, here are some ways you can "Bend Your Knee's", soften a possible fall, and take advantage of a declining market.
1) Based on my belief that the market (S&P 500) could correct as much as 15-20%, I would begin re-investing cash in thirds.
1/3rd at a 10% decline of an S&P high of 1325= 1192
1/3rd at a 15% decline of an S&P high of 1325= 1126
1/3rd at a 20% decline of an S&P high of 1325= 1060
Now, you may be asking why invest in thirds if you believe a decline of 15, or 20% is possible? The key word here is possible. Possible means: Capable of happening or occurring, it is not an absolute.
By investing in thirds, I take the guesswork out of investing, and add some discipline the process. Rarely will you ever see anyone good enough to pick market bottoms or tops. Without setting parameters, or having downside targets, you and I will be nothing more than disoriented investors.
If a market decline ends with a mild 10% decline, I would have put one-third of my cash position back to work. If on the other hand, I was waiting for a 15 or 20 % decline, and it never occurred, I would not have taken advantage of a buying opportunity.
2) Above S&P 1260-1290, I could hedge my account with the Rydex Inverse Dynamic S&P 500 Fund (RYTPX), and or the Rydex Inverse Dynamic Dow Fund (RYCWX).
The Rydex Inverse Dynamic S&P 500 Fund (RYTPX) "seeks investment results that correlate to 200% inverse of the S&P 500 index". So if the S&P goes down 10%, the Rydex Inverse Dynamic Fund seeks to perform 2x's the opposite of the underlying index.
The Rydex Inverse Dynamic Dow Fund (RYCWX) "seeks investment results that correlate to 200% inverse of the performance of the Dow Jones Industrial Average". So if the Dow goes down 10%, the Dynamic Dow Fund seeks to perform 2x's the opposite of the underlying index.
Despite the recent calls for excessive speculation in commodities, we believe the commodity bull is still alive and well. What we have witnessed is nothing more than a sharp correction in a longer term bull market.
In addition, energy remains in a bull market, and like commodities it will suffer sharp corrections along the way. Crude could trade in the low $60/bbl range, but we believe this story is far from being over.
