With the Dow recently surging past 17,000, the debate is on about whether it is a bubble that is looking for a pinprick or if it is a strong bull market that will power past 18,000 and beyond.

Yes…it could definitely go to 18,000 or 19,000 or more in the short term because the main driver is not a bullish economy…it is the bullish impact of Federal Reserve policy. In other words, this is an artificial bull market that is driven by monetary stimulus. The danger of a pull-back or a sharp correction grows more real every day; investors and speculators need to start treading cautiously.

There are plenty of things happening lately that paint an ugly picture. The U.S. Gross Domestic Product (GDP) from the first quarter of 2014 was negative and the general economy still looks problematic and sluggish. Meanwhile, the international scene is loaded with negative activity ranging from the ongoing crisis with Russia and Ukraine along with violence and war in the Middle East.

It is a schizophrenic scene; conflict and negativity across the globe and difficulty across our economy yet the stock market seems to keep shrugging off any potential worries and keeps powering up. What should investors do? After all, as any “prepper” would tell you, you get ready before the trouble starts. You never attempt to buy fire insurance when the house is already burning down. To me, a major market correction (or worse) is a matter of “when” and not “if.”

In a different venue (such as at my youtube channel or blog), I get into greater details about why today’s market warrants major concern (and what to do about it) but in this article I want to address some points that  investors  and speculators should consider (and/or discuss with their financial advisors).

Investors

First of all, an investor should analyze his/her situation before you look at your stock portfolio. If you are, for example, in your thirties and you have a long time horizon (7-8 years or longer) then don’t sweat the occasional pull back. If the stocks in your portfolio are of solid, profitable companies that are selling products and/or services that consumers are buying today and will continue for the foreseeable future, then don’t be overly concerned about a temporary pullback. Quality companies that had their stocks plunge during the 2008-09 crisis recovered and are now higher than ever.

If, for example, your situation is that you are in your mid-sixties and very close to retirement, then consider defensive strategies such as utilizing stop loss orders and switching from growth stocks to those public companies that are stable, established in their market and also pay dividends.

Here are some further points/ questions that you should consider (and discuss with your financial advisor):
•    Which stocks have gone up the most in your portfolio? If they are growth stocks and their fundamentals are shaky (shrinking profits, high debts, faltering sales etc.) then consider selling them or using stop loss orders.
•    Are you adequately diversified among industries? Consider stocks of companies that are in those industries that will keep chugging along regardless of domestic and international skirmishes such as water, energy, food, etc. In my seminars, I like to refer to these as “human need” stocks.
•    Are you adequately diversified away from stocks? Do you have cash in the bank, physical precious metals, US savings bonds, etc.? When the stock market seems to be doing very well, that is the opportune time to take some profits and deploy the money elsewhere.
•    Are you using hedging strategies? Many investors use vehicles that can help their overall stock portfolio perform at a safer level such as using option strategies such as protective puts and covered calls (more about these strategies at another time).

Speculators

For speculators (and traders too), a frothy, “over-bought” market provides some opportunities to profit from a correction or crash. Given that, consider long-dated put options.

Say that you want to profit from Nasdaq plunging. What is the safest way to speculate on this type of event? If you are bearish on the Nasdaq, then consider buying puts on the Exchange-traded fund (ETF) with the symbol QQQ. QQQ (currently at $99) is an ETF that attempts to mirror the Nasdaq 100 index. Nasdaq is top-heavy with tech stocks and other growth-oriented stocks (which usually don’t pay dividends).

A put option with the strike price 90 that expires in January 2016 can be bought for less than $500. If you are correct in your outlook and it plunges, your Put option could easily provide you with a triple-digit gain. If you are totally wrong then the worst that happens is that you could lose most or all your money tied to the put option (in this case, less than $500).

A second way to speculate is with inverse ETFs. The short answer is that an inverse ETF gains from an opposite movement in that particular index or investment. Using Nasdaq as our example again, The inverse ETF for it would be QID (Proshares Ultra-Short QQQ). Its recent stock price was about $44. If the QQQ ETF crashes, then QID would soar.

Well I barely scratched the surface but take these main points to heart and your investing and/or speculating pursuits will be safer and continue to be profitable in due course. And if and when the stock market does correct or plunge sharply, you will sleep easier (and look smarter at that next barbeque get-together).

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