Wednesday, June 17, 2009

My Plans for the Stock Market Pullback

The long awaited correction is finally materializing, which is a good thing for a couple reasons. First, the rally since March 9, 2009, couldn't continue at the same rate. A pullback needed to occur before the a further advance. Second, it will allow me to make some stock purchases as good (i.e. lower) price points. Here's what I'm doing:
  1. Be patient. If this is truly a correction, it should last more than a few days. I estimate at least a month, maybe as long as three months. I'm going to wait for at least a 10% drop before considering a purchase. I may wait for as much as a 30% drop before making an initial purchase.

  2. Make partial purchases. Because I rarely ever pick the exact bottom, I am dividing my planned purchases into halves, thirds or fourths. That way I will have additional funds to buy additional shares should the stock decline further.

  3. Update buy list. I'll do an update of the buy list from my modified Unemotional Growth Investor system. Currently, I only have one buy on the list, Cognizant Technology (CTSH). I want to be ready to make some buys should steep declines occur.

  4. Sell some more current holdings. Many of the stock I own have rallied significantly since March 9. I have been selling into this rally. Today I took the opportunity to sell some more shares.

  5. Buy some inverse ETFs. Although they are not a good longer term hedge, I'm buying small positions in a couple inverse ETFs as a hedge against short term steep declines. The main one I'm considering is the Proshares Ultrashort Real Estate (SRS). I may also consider buying the Direxion Daily Financial Bear 3x Shares (FAZ).
At this point, I don't expect it to take out the March 9, 2009 lows. However, I will hold back at least 25% of my funds, in the case the market does dip lower.

Disclosure: At time of publication, I do not own any of the mentioned stocks or ETFs.

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

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