Year End Rally?

I think this week will confirm whether the stock market rally of last week will continue until the end of the year. If low price stocks, such as Citigroup (C), Fannie Mae (FNM), and Ford (F), continue to move up sharply, I will plan on a strong year-end rally. Should a significant rally occur, here are the actions I will consider taking:

Reduce exposure to stocks up to 33%. I believe that any rally will be short lived and the market will decline again in 2009. I will sell a portion of our managed portfolios into a year end rally to generate cash for investing in the future.

Buy call options on stocks which may significantly rebound. For example, I think Ford stock may gap upward if a favorable bailout decision is made by Congress. Ford appears to be in the strongest financial position and therefore, may benefit the most in the long run. By buying call options, I can significantly increase returns for a small investment, e.g., $100. Of course, the downside risk is that I can easily lose the entire investment.

At this point, I don't feel optimistic that a year-end rally will occur. However, a market indicator that I follow shows that a year-end rally may be possible and I want to be prepared if one should occur.

Disclosure: At time of publication, I do not have any of the stocks or options of the companies mentioned.

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This is not financial or investment advice. Please consult a professional advisor.

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