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BULLS MAKE MONEY. Bears sound smart. Remember that and forget for a while all the high-minded reasons why specific stocks, and even entire markets, are poised to fall.
Just buy high-quality stocks and be like the government guardians of the U.S. economy: Worry about tomorrow the day after tomorrow. In the meantime, don't fight the tape, or the Federal Reserve. Get leveraged upside equity exposure with call options. Sell puts on stocks you want to own, or already own, for added octane.
These are some of the steroid strategies investors are using to make even more money off the anticipated continuation of rising stock prices.
As Société Générale's Rebecca Cheong, director of global engineering and strategy, put it in a Friday note to clients: "Tail risk—it may now be on the upside."
So many money managers are lagging behind major benchmark indexes that they are playing a game of catch-up. But this past week brought an important reminder that investors need to own stocks. Tuesday's sharp stock decline, which some traders saw as the beginning of the end of the latest bull run, scared many. Yet stocks bounced back on Wednesday, which shows the stock market has a definite, persistent bid.
Some will say the stock market rises when the dollar weakens, and vice versa, but there's more than just that. In the blunt talk of order flow: Investors want stocks. "It's a one-way street; clients are rotating into equities," a top trader said. Why?
Investors expect Republicans to win mid-term elections on Nov. 2 and to take control of Congress, and the wheels of the Wall Street-hating, taxing Democratic bandwagon to grind to a halt. An extension of the Bush tax cuts would be good for stock prices, too.
The Nov. 3 meeting of the Federal Reserve's interest-rate-setting committee is another key event. The Fed is expected to release details of its plans to stimulate the economy. A big, bold QE2, short-hand for the second round of quantitative easing, could push markets higher, especially if the Fed spends big money buying Treasuries.
"The only time we ever see selling is when the dollar gets strong. Accounts are putting on risk. It's clear sailing until early November," says a senior trader who presides over one of Wall Street's top derivative desks, who can't be identified because he isn't allowed to speak to the press.
Because so much is riding on these two events, prudence dictates a modicum of bullish caution. High expectations inevitably lead to some profit-taking, or sharp declines, so think about spending a little money to hedge stocks and portfolios.
Scott Fullman, WJB Capital's derivatives strategist, advocates replacing long stock with bullish call options. The stock-replacement strategy lets investors lock in profits on winning stocks and still participate in future gains with bullish call options. Investors who prefer to keep stocks, but still protect against November's possible reverberations, can consider selling Standard & Poor's 500 Index November 1210 calls that recently traded at about $8. Fullman likes the 1210 calls because they mark the April market highs.
Shawn Gibson of Gibson Volatility Management, a Richmond, Va., investment advisor, says anyone who sells the calls has to be extremely vigilant. Though the short-index call position is far enough away from the market's current price of 1181 to avoid major problems if stocks surge, the mood in the market means stocks could move on a dime. After all, stocks could surge higher if QE2 exceeds expectations.
"This is an extremely fluid market situation. You could see movement before November second and third," Gibson says. "You have to watch for market breakouts— and breakdowns. You can't sit and wait. You have to be nimble and willing to adjust positions."
The next eight trading days could prove the most important of the entire year.
Comments: steve.sears@barrons.com
http://twitter.com/smsearsBarrons
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