How to protect your profits and Portfolio in a downturn.

Well the last week has been interesting.....If you have been following this blog then you will know over the last month or so I have been becoming increasingly nervous about a downturn and we have seen some of the markets teeth in the last week or so.

I dont think it is over and I believe we have more downside to come-increasingly people's appetite for risk is diminishing and we are seeing the Yen Carry trade possibly starting to unwind as people get nervous and start to liquidate their Yen positions.If this happens then it will have ramifications across the globe.

One of the more challenging things to be able to do in a downtrend is trade it-either as a speculator looking for profit or to hedge your longer term holdings.This can be more difficult in certain types of accounts as there may be restrictions in selling short or using options.

If you are in this situation then I urge you to look at some of the Pro Shares at

www.proshares.com

They have a number of Short Proshares which you buy like a stock but they move in the opposite direction i.e. as the index they are related to goes down the Proshare price increases.It allows you to profit from a down market or use them as a hedge to protect your existing positions.

Two of the Proshares I like are the Short Dow 30 (DOG) and the Short S&P 500 (SH), you can also get Ultra Short funds which are double the downside .In this market I urge you all to look at doing one or both of the follwing :

1/ Take Profits off the table and lighten up your exposure

2/ Hedge what is left in your portfolio to reduce your downside

If you cannot or dont want to do either of these then consider going in to cash until the dust settles.

As ever good trading

Alan

Tags: Shorting, Pro Shares, DOG, SH, UltraShort, Hedge

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Lightening up on Some positions-Think there is increased possibility of Downside

Firstly apologies that I have not been able to post for a week or so I had some computer problems and I was travelling so was not able to get any posts out.Well yesterday was a real shake out.Today there seems to be some buying on weakness, I am glad I bought some SPY Puts a little while back as they softened some of the downside-I still was down around 3.5 % yesterday though.

I am not convinced we have seen the last of the selling and yesterday was a timely reminder of what can happen when everyone rushes for the exits at once.I am waiting to see where the Market closes and also what the voulume is like today, if we are up but volume is weak then I think we are in for some more selling sooner rather than later.

Some selling was long overdue, it would have been nice if it had not all happened at once though !! I took the opportunity to lighten up on some positions today so that I have some cash to take advantage of any opportunties but also to take profits or to reduce my exposure to some of the more High Beta stocks which will move a lot if the market sells off again.

I sold the following from my Pension Portfolio and My ISA

Linear Technology- LLTC sold for an annualised 6.38% Loss

Realty Ome Exchange -O sold for an annualised 24% Gain

Level 3 Comms LVLT-Sold for an annualised 26.5% Gain.

I would be extremely cautious about adding any positions at the moment I think we need to take some time to see what transpires in the next couple of weeks before we decide our next moves.

Sometimes the smart trade is to do nothing !!

For those of you old enough to remember the TV series Hill Street Blues -

" Lets be careful out there "

Best Wishes

Alan

Tags: LLTC, LVLT, O, Level Three, Realty, Stock Market Decline, SPY, PUTS

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LEAP in to Caterpillar(NYSE:CAT)

As I have said before I am increasingly looking at using longer term option plays to get myself in to stock. I have been looking at Caterpillar( NYSE: CAT) for a while as it has come off its highs steadily since May last year. It is currently not in favour as most people think it is a play on the state of the US housing Market.As I have outlined in this blog on previous occasions the big money is to be made going against what your psyche is telling you.

We tend to not want to buy something that is out of favour but want to pile in with the crowd-remember the halcyon days of Dot.com ?? The issue with Caterpillar is that it is not solely reliant on the US housing mkt in fact a large proportion of its revenue comes from the heavy mining and construction side of things.Therefore these two old chestnuts of Natural resources and China come to the fore again.

If you look through this blog, it is unmistakable that I am a commodities bull, as our needs for raw materials and commodities such as copper, coal, iron ore etc etc increase-China and rest of world demand, then the machinery necessary to excavate, transport and deliver these commodities is bound to be in increasing demand.Caterpillar is a major player in this market so increased demand for these commodities is likely to drive increased demand for their equipment.

This is not a story that has been really picked up by the general investing public hence the shares are languishing. I believe though that eventually this will sink in and people will start to pile in.

To further enhance the potential upside Caterpillar today announced a 5 year plan to buy back $7.5 Billion in stock, that is about 17% of the outstanding shares.On its own that would be enough to give them a boost.Coupled with a likely increased demand for the shares then I think Caterpillar is a good mid term play.

The shares were up today closing at $67.62, there are a couple of ways to place this, you could buy the stock outright, or as I favour you could look at a LEAP option, if you have read my previous post on Delta then you will know we want to go for an ITM (in the money option).I favour the Jan 2008 60 Call, it shot up a bit today closing around the $11-50 mark this means you would pay $1150 for the right to buy 100 shares of CAT for $60 any time up to Jan 2008.The break even is $71.50 at today's close, the delta is around 80 which means you will get approx 80c movement in the option for each $1 movement in the stock -but you are paying a lot less to control 100 shares worth of stock than you would buying them outright.

I am going to buy the LEAP and will pay up to $12 with a view to holding it for 6-9 mths unless we get a short sharp increase in the stock when I may consider selling it early.

Best Wishes

Alan

Tags: LEAP, options, Caterpillar, CAT, Delta, share buyback

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Performance Curve Updates

Posted above are the latest Performance Curves for my Pension Plans.The top graph is the GBP Portfolio and the lower one is the US$ Portfolio, pleasingly both have shown improvements this month particularly the GBP portfolio with a 4% gain on the month bringing the overall performance from the start to 40% return. The US Portfolio was also up but only slightly up about 0.5% for the month.The US portfolio is showing a 15% increase since inception.The US portfolio suffered a bit this month as the LEAP options on Microsoft (MSFT) gave back some of their gains.I am expecting that the US portfolio will shine when the Commodity and Natural Resource stocks do well as it is fairly heavily weighted in that direction. If we continue to see gains in Crude Oil and Precious Metals then the holdings in companies such as Goldcorp (NYSE:GG), Silver Wheaton (SLW-T) and the Oil and Equipment Services ETF (NYSE : IEZ) will generate some good returns. Silver and Gold seem to be looking to go higher here , although we could see some consolidation or even a pullback before we see Gold over $700 and Silver over $14.

Oil has been flirting with $60 all week and it is still uncertain which way it will go, weather and increasing Geopolitical tensions are playing their part and if these ease then we may see another pull back to the $55 area or below.However I firmly believe that Oil at those prices is a good buying opportunity as I do not believe these low levels will be sustainable.

It is interesting to note that once they got used to the revenue with oil at $60+ a barrel the OPEC Cartel seem very reluctant to see oil back down at the $50 mark.I imagine every time we see any pullbacks to those levels we will hear the jawboning from the Oil rich countries about production cuts etc, which will serve to put a floor under the price.

In my next article I am going to look at the part Dividends and High Yielding Assets can and should play in your Portfolio.

Best Wishes

Alan