Alcoa Tells Us To Continue Hedging The Market

| January 14, 2009 | 0 Comments

I don’t know about you, but I’m confused.  Totally, thoroughly, utterly confused.  Strangely enough, I’m not confused about my investment strategy.  I’m not even confused about the market.  What confuses me is the “market sentiment.”  That’s a fancy word investing professionals use to describe investors’ expectations and reactions.

I’m really confused over what investors and traders are thinking.

I’m really wondering if anybody is looking at market information.  Investor expectations are clearly disjointed from reality.  What do I mean by that? Let me give you two perfect examples… then I’ll tell you what to do to protect yourself from this craziness.

The first example is Alcoa (AA).

Regular readers of the Dynamic Wealth Report will remember Monday I wrote about Alcoa’s impact on the market (“What Earnings Season Means For Your Portfolio”).  Alcoa is the first major firm to announce earnings.  They’re also a member of Dow Jones Industrial Average.  Because of their position, they are often the bellwether to the rest of earnings season.

Often if their earnings are bad… the rest of earnings season is bad.  If they have a positive announcement… well, you get the idea.

Less than 10 days ago, Alcoa effectively preannounced earnings. Management came out and said they were working to conserve cash. They were cutting production, cutting employees, cutting expenditures.  I don’t know about you but all that cutting told me to cut my expectations.

I was prepared for the worst.

Apparently I was the only one.

   Of course the major indices didn’t like the news either.  The Dow and the S&P 500 both fell after the announcement.

Now today we’re down again.  And this brings me to my second example of market insanity.

Why are we down today?  Because retail sales were bad in December. Today the Commerce Department announced retail sales were down 2.7% in December.  So the natural market reaction is to fall… as I write this we’re down almost 300 points.

Apparently nobody (but me) was expecting a horrible holiday shopping season.

Really I don’t get it.

For more than 5 months we’ve been talking about how bad the holiday sales season was going to be.  As a matter of fact, we made some really profitable trades based on these thoughts.  In the Elite Option Trader, we suggested put options on a few retailers, including JC Penny. These puts had a peak gain of 676%.

Clearly the bad news was good for us!

Nobody likes a surprise.

I guess what it comes down to is the market was surprised.  Surprises like Alcoa’s poor earnings and the December sales numbers were shocking.  Overall it tells me something important.  Expectations were lowered, but not enough.

That means more bad news will continue pushing the market lower.

So what do we do with our investment dollars today?

We need to realize the market will be range bound for quite a while. Continue hedging your portfolio, and don’t venture out from your core holdings.  Watch the market closely… we may be starting another trend lower.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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