Daily Gains Letter

The Next Best Move for Investors

By for Daily Gains Letter |

What Investors Need to Do NextIt’s time for some more handholding as we watch the stock market come under some selling pressure. But we’re not surprised, are we? The reality is that the advance of the stock market into its fifth year looks somewhat weary, given that interest rates will be rising in 2015.

Higher interest rates translate into higher bond yields, and that’s not conducive to a higher stock market. The current 10-year bond yield is a mere 2.45%, so it’s not an immediate concern. Yet looking ahead, interest rates will be heading higher, and this could come as soon as the first quarter of 2015, rather than the previous estimate of mid-2015.

The strength of the advance reading of the second-quarter gross domestic product (GDP) growth at an annualized four percent was clearly enough to send some investors to the exits. The fear is that if the upcoming readings are strong, it could signal higher interest rates sooner. Of course, we still have to wait for the third and fourth quarters of 2014 before making a snap judgment on when rates will head higher.

The Federal Reserve has already reduced its monthly bond buying to $25.0 billion, and it’s likely to be eliminated altogether by the Fed’s October meeting. This is a given. Higher interest rates are the issue for the stock market.

In addition, there’s some nervousness towards China and Europe. The reporting of a weaker-than-expected HSBC Services China PMI of 50.0 in July is scaring the stock market. A weaker China is not good for the global economy.

In addition, we also have a potential recession in Russia, which could have a real impact on the eurozone and Europe due to the rising economic sanctions against Russia.

On the stock market charts, the technical picture is weak and vulnerable, especially with small-cap growth stocks, based on my technical analysis.

In July, the S&P 500 and DOW returned a negative month for the first time since January. The major stock market indices, including the NASDAQ, DOW, S&P 500, and Russell 2000, have all dipped below their respective 50-day moving averages (MAs).

The DOW turned negative on the year. The inability of the DOW to hold above 17,000 on four breaks was bearish. Moreover, the index is threatening to test its 200-day MA of around 16,315.

Dow Jones Industrial Average Chart

Chart courtesy of www.StockCharts.com

Small-cap stocks have shown the greatest vulnerability on the stock market, though, as the Russell 2000 hovers around its 200-day MA, in danger of moving towards the 10% correction zone.

Russell 2000 Small Cap Index Chart

Chart courtesy of www.StockCharts.com

At this point, I’m not convinced upside moves in stocks are sustainable, especially without any sustained leadership from the financials or technology stocks.

As such, I suggest you add some put options to your large positions or the key stock market indices that reflect the focus of your holdings. For instance, a technology-focused portfolio can be hedged using put options on an exchange-traded fund (ETF) like PowerShares QQQ (NASDAQ/QQQ) or on small-caps with the iShares Russell 2000 (NYSEArca/IWM) ETF. You could also hedge against a downward slide in technology via an ETF like the Direxion Daily Technology Bear 3X Shares (NYSEArca/TECS).

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