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Is The Sky Really Falling? + Vic Wisemann’s Thoughts on HOG, LEN, BAC, GE, MSFT, GOOG, IBM, DIA, QQQQ, SPY and more...

Vic Wisemann
InvestorsObserver
Featured Contributor

When the stock market was booming, most investors took an Evel Knievel approach to investing. Risk, what risk? They ignored it, just as the motorcycle daredevil did.

All investors wanted was more, more, more. They treated the market as if it would never go down. The strategy backfired. The market crashed in 2008, just as Knievel did in 1975 while trying to land a jump over thirteen AEC Merlin buses at Wembley Stadium in London on his Harley Davidson (HOG) XR-750. Knievel ended up with a broken pelvis. Today, many investors ended up just plain broke.

Some would make the case that we have made it over the busses but have not yet made a safe landing. These people subscribe to the belief we haven't hit the bottom. The market, they feel, is poised for yet another drop of 10 to 20 percent or more. These bottom lurkers make a couple of compelling arguments for a further drop.

Read on for tips on how you can still make money if the market drops even further.

You see, they believe in years with a Presidential election, the stock market should be at least flat if not posting nice gains. This theory has at its heart the belief that politicians will do most anything to stay in power. With that being the case, they will do everything they possibly can to ensure the economy looks good, at least until the election is over. The huge drop we saw last year, despite the election, shows how bad things really are, or so they say.

Some people place their faith in the "January barometer" -- a theory that says as January goes for stocks, so goes the year. From 1950 through 2000, the January barometer was accurate 92.5% of the time. Impressive numbers aside, all lore of this nature should be taken with many grains of salt. The adage that "correlation does not equal causation" should be kept firmly in mind. In case you were wondering, the Dow Jones Industrial Average was down 8.8% in the month of January 2009 and down 4.6% in the previous January.

With all this talk of how bad things are and how much worse they could still get, many investors are taking the ostrich approach. They are putting their heads in the sand hoping when they look up again the danger will be gone. Brokerage statements go unopened and financial news goes unheard.

These investors have either gone to all cash or, worse, are sitting in once lauded stocks that may not be around at the end of the year. They rode the housing and finance bubbles all the way up and don’t want to deal with the losses from actually selling their LEN and BAC shares.

What if they are right? What if the market does have another big drop or worse? Just look at GE. The stock dropped more than 25% in the month of January while the S&P index was off more than 8% and MSFT is down over 12% over the same period. With that kind of start you can see why some believe 2009 will be another bad year.

On the other hand, IBM and GOOG have both managed to add to their value in January. Google was up just over 10% for the month, while IBM was able to add nearly 9% in the month. It just shows that even in a bear market in the middle of a recession, there are still some bright spots.

Just in case they are right about more drops, it may be prudent to get some bearish play out there. Since some sectors and some companies are showing gains despite the overall market direction, I like to make general market plays on general market trackers. Whether you like to track the market with the Dow Jones, Nasdaq or S&P, there is a tracking stock out there for you.

I like the S&P myself, so I like to generally make whole mark plays using the SPDRs (SPY). That does not mean you could not make the same type of trade using the Dow tracking DIAMONDS Trust, Series 1 (DIA) or the Nasdaq tracking PowerShares QQQ (QQQQ). It mostly boils down to what you feel best reflects the market as a whole.

To make a little profit if the market stays down but have some protection in case of a rally, look for a 10% or more out of-the-money call credit spread. For a hedged trade on SPY, look at the March 95/100 Bear Call spread for a 45 cent credit. That's a 9.9% return and the stock has to rise over 12% to cause a problem.

Remember, even in a bear market, some stocks will make gains, so don’t short everything. It's not that easy. Look at each trade individually and make sure it fits into your personal goals, limits and tolerances.