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New Rules For A New Economy + Vic Wisemann’s Thoughts on IBM, GE, GM, CI, MYL, STJ, LO, DF, AMZN, GME, SVU and more...

Vic Wisemann
InvestorsObserver
Featured Contributor

I remember when I was a kid, going outside and playing with my friends. In those days we didn't have video games, iPods or cell phones. We went outside and we played games. Sometimes we played football or baseball, but other times we played weird hybrid games like flag ball or fortress.

I don't expect anyone to recognize those last two; they were neighborhood games played nowhere else in the world, as far as I can tell. Being from the neighborhood, however, I know the rules, and could probably still play. O.K. I'm too tall for fortress and too slow for flag ball anymore, but in younger years it was great.

The rules for those old childhood games stay basically the same from generation to generation. The stock market, however, isn't a game and the rules seem to be changing day by day. The mantra of buy low/sell high will probably never change, but determining just what to buy and when to get in has changed a lot over the years.

Read on to learn how to profit from the new rules.

The days of buying momentum stocks and riding them for a few years is not in the cards right now. Momentum may only last a few days in this market, but that doesn't mean you can't be in the market. You just need to be ready to move when you see the iceberg is heading for the ship to which you have tied your portfolio.

It used to be that you put your money in a few well-known large cap companies and watched it grow. Names like International Business Machines Corp. (IBM), General Electric Co. (GE) and General Motors Corporation (GM) were staples in well-rounded portfolios years ago. The stocks moved up, slowly, but in the right direction, and they paid nice dividends so you had a nice return. To diversify, you would add some value stocks and a few momentum stocks along the way.

Today, the markets are touching new bear market lows, but, despite comments to the contrary, the sky is not falling. In fact, about a quarter of the stocks in the S&P 500 are in positive territory so far this year. That may not sound great, but in 2008, a mere 25 S&P 500 stocks finished in the black. It's promising to see at least some stocks are holding up reasonably well.

It's not surprising that many of this year's winners are in defensive sectors, companies that should be able to fare well, or at least not fall badly during a recession. This is one rule that apparently is still intact, at least partially, for the moment.

Several healthcare stocks, for example, are among the market's leaders, such as managed-care provider Cigna (CI), generic drug maker Mylan (MYL) and cardiovascular-device manufacturer St. Jude Medical (STJ).

There are also a handful of consumer staples companies -- firms that make everyday items like food, beverage and personal care products. Shares of tobacco company Lorillard (LO) and milk producer Dean Foods (DF) are all up so far this year.

But what you may not have realized is that shares of many more economically-sensitive companies that were pummeled last year have started to bounce back. That could be a sign that bargain hunters may be betting on an economic rebound later this year or in early 2010.

For example, shares of online retailer Amazon.com (AMZN), which plummeted 45% in 2008, are up so far this year. Other beaten down retailers, such as video-game seller GameStop (GME) and grocery store chain SuperValu (SVU), are both up so far in 2009.

The old rule of buy and hold, however, is not in favor at the moment. The new rule is buy and hedge or just hedge, depending on your risk tolerances. Since many experts are looking at the possibility of an additional 10 to 20% drop in the market, you need to have yourself positioned to withstand the drop.

A debit spread far enough away to give you some cushion for a drop but close enough to generate a reasonable return may be the way to go in this market.

Looking at the stocks having a good year so far, you may want to consider an April 45/42.50 call debit spread on AMZN for a $2.20 debit. That works out to be a 13.6% return if the stock does not drop more than 28% before expiration in April.

The sun will rise, the sun will set, and there will be volatility in the market. Rack up your wins a little at a time and try to have some fun.