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Voice of the People

Zacks highlights commentary from People and Picks Member «DiviMO».

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Traders Wake to Reality

The market action today is certainly telling. It appears that many investors really did believe that the Federal Reserve would commence a third round of quantitative easing. Why anyone would believe this is a possibility strikes me as quite odd. Interestingly the FED admitted the economy is expected to be in  poor shape for a long time.

The first two rounds did not reduce unemployment and did not stop the housing tumble. I have said since January that the keys to the year would be Jobs and Housing and the Finance sector.  These issues are forefront for the economy and so far nothing has worked. QE1 and QE2 were terrific for stocks but  there was lots of warning that the Federal Reserve was going to change direction.

Yet investors still want to believe, just as many believe Greece won’t default and the European Crisis will be averted. How this is going to happen is definitely beyond me. So far the European leaders have made no real progress and certainly appear to not only not truly grasp the situation, but have no real strategies on how to solve the situation.

Today’s drop  is just another sign that the bull market is over. It may go down in history as the shortest bull market in history, but definitely it is over. For those who are into stocks there will be lots of opportunity ahead for buy on weakness and selling into rallies.

However for those who like me prefer options, this volatility is playing right into our portfolios. Put premiums are higher and I have been selling puts on large down days, such as today, in order to take advantage of the volatility.

There is no need to rush. Investors should take their time and pick strikes carefully. I have not been able to update all my trades, but I will do my best to bring them up to date over the coming days. Here is my strategy going forward

On stocks you hold, write deep in the money Calls. On days like today, put premiums have been 'jacked' up high, writing naked or cash-secured puts is a winning strategy, buying 1x index etf's in small increments is a strategy (in my case those are non-commissioned that have no trading restrictions). I am not one to short stocks. Buy good strong dividend stocks that have a history of 'bouncing back' when times are better.

Played properly, staying in a bear market can lead to terrific returns, but it is important to be careful and not get greedy. Close profitable positions early to lock in the profit and then look for new opportunities. Stay with large cap, quality stocks. Take your time as patience will definitely be rewarded in any bear market.

Keep some cash always available for big down days and watch using margin. I prefer to keep margin to a minimum or not use it at all.

PS: My attempt is to provide you with only with one person's opinion of how to play this market. I hope you found this blog straightforward,  not ambigious and hopefully helpful.

The most recent picks by «DiviMO» are:
A buy rating on NiSource, Inc. ([url=http://www.zacks.com/stock/quote/ni]NI[/url]),
a sell rating on Whirlpool Corp. ([url=http://www.zacks.com/stock/quote/whr]WHR[/url]) and
a sell rating on Medco Health Solutions ([url=http://www.zacks.com/stock/quote/mhs]MHS[/url]).

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