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ETF Investing: Protect yourself from the downside

Posted May 12, 2008

By Andrew Snyder

Baltimore (TFN)- It is hard to believe until last week, it was nearly a month since the Dow last posted a losing week.  Even with ominous forecasts of recession, consumer sentiment plunging, and oil prices seeming to rise just to rise, the equities market has managed to make headway. 

Well… it did manage.  The good times are over.

The Dow was in the red last week and it looks like more of the same this week.  The only aspects that may keep us in the black are falling oil prices and a strengthening dollar.  But my bet is we are in for a ride, and it won’t be fun.

Unless, that is, you are prepared for the drop.

Read the fine print

This week, we will get reports from a slew of companies that are typically strong gauges of the American economy.  Consumer giants like Wal-Mart, Kohl’s and Macy’s will all unveil their first-quarter earnings.  But it is not the Q1 results that worry me.  In fact, earnings will likely be a bit higher than anticipated.

It is the forecast and guidance these companies will issue for the remainder of the year that will scare this market into the red.  Just as FedEx did last week, these companies are likely to discuss their views that the rest of the year is looking more dismal than expected.  They will be right to do so.

The banking industry is not looking so hot today, but that is far from a surprise.

Thanks to a slew of huge write-downs, the bond insurer lost $2.41 billion in the last three months.  It is not alone.  IndyMac Bancorp, a large mortgage lender, swung into the red last quarter and lost $184.2 million. 

And just to prove that bankers are not the only folks losing their proverbial behinds, Sprint Nextel announced its lost more than double to $505 million.  It subscribers cannot dump the company fast enough.  Neither can shareholders.

A house of cards tumbles

All of this negative news is most certainly going to weigh on the equities market.  It may not happen today, tomorrow or even this week, but the index is going to plunge.  You need to take action.

The options market gives you a shot at profits as the Dow losses its legs.  Take a look at the various options opportunities offered by the DIAMONDs Trust ETF (DIA:AMEX). 

There are all sorts of weighs to play the situation, but the simplest and most effective is to simply buy moderate-term calls that are close to being in-the-money.  I like the September 120 DIA Calls (BQQUO.X).  They offer ample protection from the market’s downswings and plenty of upside potential. 

The American economy is against the ropes.  It continues to fight back, but one more good blow could send it to the mat for a ten-count.  Don’t throw in the towel; just reposition your money to soften the punch.

 

 


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Posted by Andrew Snyder · Filed Under Investment Strategies 

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