Defensive Market Strategies: A Look Into Our Defensive Playbook

by | Jan 20, 2007 | Point and Figure, Stock Market Comments

We’ve discussed several of the plays we have sitting in our defensive playbook. These are steps we can take to protect the value of your account when the market is falling. I wanted to share more defensive market strategies we use to help protect your money.

1.  Selling partial positions.

One of the toughest calls to make is to tell a client to sell a stock he has owned forever or has a very large amount of shares. There’s usually also an equal emotional connection with the stock.  Hey, it’s hard to let go!

My point is there are times when you WANT to own 3000 shares of Exxon and times when you really should hold only 300 shares. Just because your stock is giving multiple sell signals, is in a lousy sector, and the market is on defense, and your stock just gave a relative strength sell signal doesn’t mean you have to sell it ALL! But for goodness sake, shave it back! Even for the simple effect of having more cash to buy the same stock again after a price drop.  It just makes sense.

2. You can also sell stocks and buy exchange-traded-funds (ETFs) in their place.

Look, I work with clients that own a LOT of Exxon and Chevron.  We could sell these two stocks and replace it with an exchange-traded fund called the Shares Dow Jones Energy Sector, where Exxon and Chevron represent nearly 45% of that basket.  So we reduce our single-stock exposure, but still get to participate any moves up by picking up the basket instead.

Make sense?

3.  Sell calls against stocks we own.

Any time we sell something, we bring money into our account.  Selling a call is a way to bring more money into the account.  However, when the market is all really falling, sometimes the premium in these calls is not very large.  But it can help us get out of stocks if they are called away. This strategy can also be used in a market that has stalled after a nice move up.

4.  We can buy puts.

Puts can be viewed almost like insurance policies on our investments.

Owning a put gives you the right (but not the obligation) to put a stock to someone at a fixed price. Here’s a brief example:  Suppose you bought a stock like Exxon many years ago at $25.  Now it’s a LOT higher.  You can buy a put near the current market price.  It will cost you some money, but it costs money to insure your home, your life and your cars, right?

If the stock begins to fall considerably, you own something (a put) which essentially can get you out of the stock at the old higher price.  That can be a very valuable item if the stock were to collapse!

5. You can also look at shorting stocks.

Now, shorting can be a fairly aggressive strategy.  Look, we use the charts to get a high degree of confidence when stocks are moving higher.  So we can also stack the odds in our favor and also get a high confidence level when stocks are falling.  We can use this information to our benefit.

But that’s definitely NOT a strategy for everyone.

By the way, there are even MORE steps that we can take to protect your money.  But that’s enough for now.  Rest assured, doing nothing and sitting around waiting for the market to rebound is NOT in our playbook!

Learn about defensive strategies and other market strategies we use at Mullooly Asset Management by listening to our weekly podcasts!

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