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Strategies & Market Trends : Portfolio Protection + Money Management for the Long Term -- Ignore unavailable to you. Want to Upgrade?

To: BDR who wrote (33)	4/12/2000 10:49:00 AM
From: Tom Trader	Read Replies (1) \| Respond to of 57

In my first post to this thread, I stated the following: I think that the issue of portfolio protection/hedging entails several components: -the timing of when to take action -the extent of protection that one seeks -the specific instrument that one should use to achieve protection -the extent to which one is willing to sacrifice potential upside in the process of initiating any such action -the expectation of returns that one would seek to achieve -the tax consequences of hedging/portfolio protection strategies. I am going to offer my view on the first of these components, namely: the timing of when to take action. I feel that there are several components that can be examined to assess the issue of timing: -how overbought a stock/index has become There is obviously a considerable likelihood that when a stock becomes very over-bought, the odds favor a pull-back of sorts. If this is accompanied by the overall market doing the same, the pull-back can be significant. -whether a stock has had a very strong run-up because of momentum players getting on board or other factors A stock that runs up because of momentum players jumping on board invariably will decline markedly, when these players feel that the game has ended or is ending. We have seen this happen over and over again. -stocks/indices breaking important support levels The usual technical tools would be used to determine this --moving averages, trendlines, etc -the more significant cycle highs that are likely to occur I have been following the work of an individual who seems to have a pretty good record of pin-pointing highs and lows in the cycles; he is not always right by any means -- but it is an aid. I also read sometime ago that if one bought stocks November 1 each year and sold them by June 30 and went into cash, the returns would far exceed a buy and hold approach. I think that this study was done in relation to the S&P500, and obviously individual stock performance would not necessarily reflect this. -sentiment indicators This is a contrary indicator and can include things like put/call ratios, vix readings, bull/bear consensus -- and what I have found to be very reliable is when the individual stock threads on SI start ramping up on expectations. Recently, as JDSU was reaching its highs, the thread had participants calling for a trillion dollar market cap for the company, doubling and tripling its price before the year was up and so on. We have seen the same thing happen on other threads where stocks have had strong run-ups. --a windfall profit In tax-deferred accounts, I have no hesitation in taking profits when I achieve a return that is exceptional or just not sustainable. If stocks continue upwards thereafter, such is life. The reality is that if one can achieve that kind of return annually, the power of compounding will cause the most extra-ordinary gains in values in ones portfolio. In taxable accounts, I would rather not liquidate but instead establish a synthetic short position using options. Anyway, the above are some thoughts on the issue of timing -- ie when one should consider taking protective action. I would be interested in hearing from others as to their thoughts -- and if there is sufficient interest, we can talk about the other components that I mentioned at the start of this post.