Switch is made

The market has certainly taken a hard turn to the downside. After dropping 11% in 3 weeks, people are going to get a rude awakening when they get around to seeing their retirement funds and 401Ks if they were heavily in stock funds. The US AAA downgrade could not have come at a worse time. The way the GOP, TEA part folks went at it vs. the Democrats, it was clear that everything was measured carefully for political and ideological gains and the minority appeared to rule. Where is the voice of the majority? It was mostly trying to avoid a missed debt payment and in order to do the right thing accepted a poor plan for debt reduction. It seemed like with all the political bickering and wrangling, we deserved the slap that S&P gave us. The same S&P that gave high ratings to those worthless mortgage backed securities a few years back. Guess they are getting better now. And it sure looked like we were unable to come up with a decent plan except for the poor compromise agreed to in the last minute.

I am really glad that I was hedged fully on the long positions I had in my 401K, which was about 25% of my portfolio. After I saw how much the 401K stock funds had gone down, it was also a surprise to see how much my SPY put options had gone up. Still I won’t lie. The net position was a “tolerable”loss. I hate losses. I also feel like kicking myself for missing out on the down play on ANR. The signal came sometime last week and I was traveling on business, and that is my excuses. Excuses don’t make money. When those signals come, I have to act regardless of how tired I am when I look at the info.

My monthly analysis on my 401K done this weekend says to make the switch to bond funds, Fidelity Government Income fund and cash. It points to pulling out of all stock funds. Who knows what awaits us on Monday after the rating downgrade. The best we can hope for is a mild day. If the Asian markets and Australia takes it on the chin and the US starts with a huge gap down, it is quite possible that many traders will fade the day and the markets could slowly recover. I will place the exchanges over the weekend as I am traveling to one of our plants during the day.

If the market opens with a huge gap down, then I may very well sell my put options on SPY that are in-the-money and profitable and trade them for the same number at-the-money at market prices. I will have to place that trade before I go to work as I will not be watching any of this during the day. By placing this trade, I will be pulling out some profits on the hedges and taking some money off the table. At some point, the market is likely to bounce as shorts cover and I do not want to give up my profits. We are quite oversold right now and could get a sharp bounce. Or we could continue to stay oversold a little longer and go down sharply. No one knows for sure. But the picture for me is to switch back completely to cash and bonds till next month’s analysis on my 401K. That means I close out most all of my long stock funds that was about 20-25% of my portfolio. The other thing I cannot predict is how long this will all last.