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Strategies & Market Trends : MDA - Market Direction Analysis
SPY 671.910.0%Nov 14 4:00 PM EST
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To: Stephen M. DeMoss who wrote (28005)9/30/1999 2:11:00 PM
From: Fun-da-Mental#1  Read Replies (1) of 99985
 
Stephen, re. how to profit from a downtrend, my strategy is to buy puts on or short financial sector companies whose profits will be hurt by a decline in the market. That way if the market corrects they get hit with a double whammy of declining profits combined with a bad environment for all stocks. Last year when the market dropped 20%, most brokers and investment banks dropped at least 50%. Puts on these companies are priced higher than index puts, due to their higher volatility, however I think the put prices do not fully account for the potential of these companies to crash in a bear market, so these puts represent good value.

A more speculative put/short is MSFT. It held up during the market correction last year, so it gives the impression of invincibility, and so out-of-the-money puts are very cheap. However if PC sales slow down, MSFT is going to be hurt just as badly as the hardware companies, plus its P/E valuation is much higher so it has further to fall. Thus MSFT puts might be a bargain too.

I'm buying puts with expiry 3-6 months from now. I think that time frame offers a risk/reward ratio I'm comfortable with.

Fun-da-Mental
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