On Tuesday I wrote that I felt that the gap up opening was not appropriate given the negatives that are out there. Investors certainly paid attention to them yesterday as a few more poor economic reports hit the wires. I am surprised that the selling was so intense yesterday, but not shocked that the market dropped. Yesterday’s action suggests that some are now pricing in a double-dip recession. Here is how to play it.
D-E-F-E-N-S-E
Investors haven’t had to play much defense for the last two years, but the time has come to steel up your portfolio. There are several ways to do this and it should be done now. The first thing to do is to sell some of your big winners, especially if they are in high-beta stocks. If you were smart enough to bag big gains from the likes of Netflix (NFLX), Chipotle (CMG), OpenTable (OPEN), or MolyCorp (MCP), now is the time to ring the register and take some money off the table. As Jim Cramer always says, “Bulls make money, bears make money, but pigs get slaughtered.”
Cash is king when things go south in the market. It allows you to be flexible, unbiased, and gives you the ability to pounce when others are panic selling. Developing a shopping list of strong stocks you would like to buy when things settle down is a great way to sit out the carnage.
If you are so inclined, think about taking a few shorts positions. I don’t recommend this for everybody; only those who are familiar with shorting and its risks. Another way to get short exposure is to buy inverse ETF’s, which increase in value when the market drops. Direxion has several of these that inversely track a certain index such as the Russell 2000 (TZA). This ETF goes up 3x the inverse of the Russell 2000.
For the more conservative investor, think about buying some defensive blue chip stocks with high dividend yields. Altria (MO), General Mills (GIS), and Procter & Gamble (PG) come to mind. These stocks will hold their value much better in a down market, and you get paid to have these stocks in your portfolio.
Easy To Undo
If you are wrong and the market just continues its zoom higher, you haven’t lost that much by getting defensive now. It is relatively easy to rebuy those more speculative stocks and add market exposure. This is a big advantage that you have over the big institutions. They have to buy and sell in big blocks over several days or even weeks. The important thing is to preserve your capital when things get tough. The recent economic data suggest that time is now.
Time To Play some Defense is an article from: 
