Don't Swim Naked

We've just entered "The Twilight Zone"

Just wanted to touch base again after another rough day for stocks. The S&P 500 shed 100 points and fell more than 3% for a second day in a row. Major stock indices are now trading between their 50- and 200-day moving average, or what I call "The Twilight Zone" (more on what that means in the video below). And while the losses sustained by stocks on Monday and Tuesday might have been similar, other parts of the market are signaling the worst may be nearly behind us. So in today's video, I'll review what it means for stocks now that they're in the twilight zone and what gold, bonds and The Volatility Index (VIX) are signaling. But before we jump into that, I want to emphasize something I told you a few weeks ago… Markets have a way of pulling the rug out from under investors' feet when they least expect it. And that's when you find out "who has been swimming naked," as Buffett would put it. And based on some of the emails I've received, some of you have been skinny-dipping in the market. By that I mean trading without a hedge or not using proper risk-management techniques. This simplest and most effective way I know to protect a portfolio is never being 100% long (or short). You can't predict when markets will fall 6% in two days, so it makes sense to always have something in your portfolio that's likely to increase in value when markets get crushed. Let me give you an example using my Alpha Rotation strategy. It's designed to outperform the market in good times and at least protect portfolios when the unexpected strikes. It does that by going long sectors in the S&P 500 (using ETFs) most likely to beat the benchmark and short a sector that's likely to lag. Here's how the strategy is doing after the market got shellacked this week.

We're up 13% on average after one of the worst back-to-back performances in market history. As you can see, there's nothing magical about my strategy. My long positions were crushed, as expected when the market falls off a cliff. But my hedge — a short position in Energy — more than made up for my losses. All I'm saying is… don't swim naked.

Roger Scott WealthPress P.S. Another way to decrease risk is to minimize the time you spend in the market. In other words, get into a trade before a large move and quickly get out. And there's one trader that's made a career out of "24-hour trades." He deciphers data from the options market to strike moments before a stock jumps or crashes. Even though the trades are short-lived, the gains are often in the triple-digits. He's about to go public with his strategy…. and you can get the details by going here.

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