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The market trend is only your friend if you are in the market!

Market Trend, The trend is only your friend if you are in the market! Over the course of a trading week, there is a huge amount of data that flows around, most of it relevant in some context, some more important than other for stock market investing.  Two things that captured my attention last night was the move down in iron ore prices and the move up in the US market – opposite indicators, yet both seem to be having a similar effect!  The rising US market is making people nervous (albeit not the US consumer, who seems to be out in force) as is the drop in iron ore prices.
Let’s start by looking at the US – the world’s largest economy.  The Dow Jones index has continued its longest rally since 1996.  What that means, folks, is the stock market is going up.  However, how many out there remain unconvinced, arms folded and are wearing their Bearskin hats?
The thought of “better get out now, before it collapses!!” mindset reminds me of a former colleague who was about as positive and upbeat as a fairly severe case of haemorrhoids – gee how our trading team and I miss that every day!
Back to the Dow – now this is a tough one, as the experiences of 2008 and 2010 have significantly scarred many – both emotionally and financially and as a result, the action thresholds are higher.  In other words, because of the past, SO much more proof seems to be required to get stuck in, this time.  Now of course, this is not surprising as human nature is what it is, and hence why those who succeed in the markets have a unique psychology, when it comes to their trading decisions.
Odds are some of those not invested right now, will wait and wait, almost until the very end of the bull run, and finally click the trigger, just as the market pulls back, then reinforcing their decision to have stayed out – should have waited etc etc.  I sincerely hope that is not you, and you time your entry and management to be buying in on the dips, not running for the hills.
Then of course, in the meantime, those that have been in the thick of it for the past 6 months have a sufficient insulation of banked profits to be able to absorb a pullback in prices, again searching for another dip to buy into and make even more profit.
This is the familiar story that I have been writing about for months – the only way to get paid, is to be in the market, not out of it, so get stuck in!

So what about Iron ore?

It’s off a bit, but my pal in Singapore is still trading a fairly large chunk of the world’s production on his book, and it continues to be consumed in gigantic quantities.  As such, will we see a panic, and an opportunity to be re-entering BHP in the low $30s?  Alternatively, will we see a reversal, as the stock garners support?

How do you capitalise on this?

Good question and probably something that would be of interest to most readers – so here are a couple of strategies you may wish to consider, depending on your appetite for risk, investment objectives and of course trading account.
Say you are holding stock right now, and are nervous of a potential drop in the stock – and you don’t want to sell the shares – perhaps there is a dividend coming up, or capital gains issue etc.  Why not implement a collar.  This is where you buy some insurance on your position – through the purchase of a put option and then to offset the cost of the insurance, sell a call. Now you are in a position where your position is protected and quite possibly for zero cost or close to it, as you paid for the put option with the income from selling the call option.  Case in point right now – insure your BHP for $34 out until April can be done for a nett cost of just 24cents!  Not sure on this? Let us help you learn more and give the peace of mind that comes from being in control of your investment decisions.
How about you want to get long the stock and sell some call options, but don’t want to expose a large chunk of cash into the market and so are nervous about buying the shares.  Instead of buying the stock, how about buying a long dated call option and then selling short dated call options over this – effectively a calendar spread.  Entry into the call options would be only a fraction of the cost of buying the shares, removing some of the dollar risk, and the regular income from selling the short dated call options would make this a very reasonable cashflow opportunity. Not sure on this?  Let us help you learn more and give the peace of mind that comes from being in control of your investment decisions.
Alternatively, you can do nothing, hoping the market falls, and celebrating when it does, because of course, you were right.  Question is, do you want to be right, or do you want to be Rich? Rather than be passive, if this is your view, trade it – buy some puts, and make a killing as the market drops because as always, markets ONLY reward action takers

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