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HOW A BLUE COLLAR INVESTOR MANAGES A VOLITILE MARKET

WOW! It looks like we’re in the midst of another 10% market correction from its recent highs. This can drive the average investor crazy, but not us. First and foremost we must remember our commitment to the system:

– GoldenRule #1: We must be willing to accept a certain amount of risk. We understand that the Stock Market has an inherent short term volatility. Think back to the 1-year chart of the S&P 500.

– We will never, ever react emotionally. All our actions will be based on sound fundamental and technical principals. Exit strategies become more important in these times as we prepare to buy back options to roll down, hit a double, or convert dead money to cash profits. As the Boy Scouts say, “Be Prepared”.

Two system modifications I make when the market is in an unusual downturn are:

1- Elevate my Group Technical requirement from a “C” to a “B”. This will result in a greater chance of stock appreciation or decrease the possibility of depreciation (remember,we still make money even if our equity values remain the same as the  price we paid for them!).

2- Sell only In-The-Money Strike Options. This will give us additional downside protection This is adhering to our system policy of valuing risk reduction more than profit returns. We will still be very well paid if we follow these rules.

As a result of these minor changes, our monthly returns will be towards the lower end of our 2-4% monthly profits. This is because our pool of stocks is decreased due to modification #1 and our upside appreciation potential is eliminated due to modification #2. All in all, well worth it because of the increased risk reduction.

One thing that has become apparent to me over the years is that even in a down market there are industries that perform well. It is our commitment as Blue Collar Investors to locate the best performing stocks in these groups. Today, I did an industry analysis. My goal was  to locate those groups that have performed well over the last week as well as the last 2 months. In other words, these industries are the hottest in a very cool marketplace. That, my fellow Blue Collar Investors, is where we want to be.

The following list shows the industries that have performed well both over the last week and the prior 2 months.

Under these groups, I have listed the top performing stocks that meet our IBD requirements. I leave it to you to run it through our risk/reward screen, technical analysis and calculations. Uncover the gems, dust them off, and deposit them in your local bank!

Now the list:

Tobacco:

     BTI

Beverage(non-alcoholic):

     KO

     PBG

Major Drugs

     LLY

     ARXT

     AXCA

Gold/Silver:

     AUY

     PAAS

     BVN

     ABX

Electric Utilities:

     FPL

     ETR

Crops/Agriculture:

     SYT

     MON

This approach to a market in decline is not rocket science, simply common sense. You, as CEO of your own money, are the ones best suited to handle these situations.

Note:

I have received a few questions regarding the significance of analysts recommendations. I will do my best to take the high road in responding to this question:

– There are many intelligent, well-intentioned, astute analysts out there; we just don’t know who they are!

– Many analysts work for corporations that have financial ties to the companies they are analyzing. This creates an inherent conflict that may skew their recommendations.

– These experts can’t agree with each other; how do we know who to follow? I just checked the analysyt’s recommendations for Intel, a heavily followed corporation. Here are the findings:

     Strong Buy: 3

     Buy:              4

     Hold:             8 (Hold is one of the most useless ratings ever created, what do we

                               do?)

     Sell:               4

     There you have it, now go ?*%#!

– Whenever a brokerage firm changes a recommendation, it generates trades. Are there times that recommendations are made, simply to promote business? Just asking!

– A change in an analyst’s ratings will effect the price of our holdings in the short run. Ultimately, though, the price will return to a level based on the fundamentals and technicals.

So what do we do? I do one of two things: Either I hold both hands over my ears and hum loudly as the analyst speaks or I run the stock through our system to see if I’m in agreement. Then, and only then, will I be acting as CEO of my own money. Never buy or sell a stock simply because an anlysts tells you to!

Note:

     Feel free to hit the comment link to respond to my articles. This will help guide me to  address matters that are important to you. Also you can add information to assist others in our group.

Wishing you all the best in investing.

Alan

    

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

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3 Responses to “HOW A BLUE COLLAR INVESTOR MANAGES A VOLITILE MARKET”

  1. Tony C. January 11, 2008 7:55 am #

    Alan, I ran those Analysis stocks, and for what its worth this was my report:
    Note:I ran all these stocks through our system first of course on Fri. 1/11@10:30am

    (BTI) has the best returns around 4.5%!
    (SYT)has strong technicals and a 2.8% return
    (MON) strong Technicals and a 2.2% return
    (ABX) strong technicals and a 2.2% return
    (PBG) Macd. was minus at the time so I passed on it, and the others didnt have good returns I thought (while staying in the money).
    Hope this helps out someone or if I am wrong please correct me,
    Thanks
    Tony C.

  2. Alan January 12, 2008 5:37 pm #

    Tony,
    Thanks for your excellent analysis. I’m really impressed with how quickly you’re picking this up.
    You are correct about the MACD being slightly negative for PBG. However, note that the MACD Histogram has turned positive over the last few days and this gives us an earlier clue as to what may happen to the price of this stock. As a result, I would NOT eliminate PBG based on a weak MACD.

    Keed up the great work!
    Alan

  3. bruce January 17, 2008 8:05 pm #

    Great refresher course tonight, Alan.
    It clarified many salient points and reaffirmed that which I already knew.

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