EconMatters: What to Do in the Next 6 Months

Friday, June 10, 2016

What to Do in the Next 6 Months

Thus far, 2016 has been an absolute rollercoaster ride of market ups and downs for investors.

In January, the talking heads foretold recession.

Now, the S&P 500 is on the verge of setting a new all-time high, oil has closed above $50 for the first time since last July, and thanks to the sinking U.S. dollar, gold may actually breach the $1,300 barrier this month.

But as stocks approach overbought levels, can the good times last? And more importantly, where do we go from here?

While I won�t pretend to know exactly what the future holds, here are three ways to prepare your portfolio for whatever lies ahead�

1. Take Some Money Off the Table

If you were brave enough to buy dips in stocks at the January and February levels, you�ve likely been rewarded with some handsome gains.

And if you�re one of these fortunate folks, you might consider booking some profits and raising some �dry powder.�

Longtime readers know that I don�t put much stock in the �Sell in May and Go Away� adage.

But I do encourage keeping cash on hand to take advantage of opportunities as they present themselves.

And history is telling us to expect one such window to open up soon�

Over the last 10 years, the S&P 500 Index has averaged a decline of 1.31% during the month of June, excluding dividends. And June�s losses are back-loaded in the second half.

From June 16 to June 30 in the last 10 years, the large-cap index has fallen 0.91% on average versus a 0.28% decline in the first half of the month.

Fast-forward to the July medians, when the index gained 1.13% on average since 2005, and the verdict is clear: It�s time to free up some capital for the end-of-June �stock sale.�

2. Load Up Your Watch List

Louis Pasteur once famously said, �Chance only favors the prepared mind.�

In the context of investing, the better prepared you are ahead of buying opportunities, the more successful you�re bound to be.

I always encourage investors to keep an up-to-date watch list of at least 10 to 15 stocks, across multiple sectors, at all times. So when the market dips, you�re already in a position to strike.

As a chartist, I primarily use a stock�s chart to guide my entries and price targets for trades.

But if you�re a fundamental investor, then you should know your target stocks� historical valuations inside and out.

This way, you know what a deal actually looks like on a stock, from a value perspective.

Take, for instance, Apple Inc. (AAPL).

After several years of rip-roaring gains, Apple�s stock has declined 23% in the last year, and its price-to-earnings ratio fell below its five-year average in late 2015.

In fact, Apple�s price-to-earnings ratio fell last month to a three-year low. It�s trading at a discount to its five-year price-to-book and price-to-sales ratios, too.

This is the kind of sale for which you�ll want to keep an eye out.

And when the market falls broadly � like it soon may � many brand-name stocks will be suddenly marked down.

Now is the time to get these stocks in your sights while the market�s calm.

3. Be Patient

Finally, with cash on hand, and a watch list ready to go� sit back, relax, and let the market come to you.

Some investors will tell you that you can�t time the market and while it�s nearly impossible to predict market bottoms or tops, you can increase the profitability of your short-term trades by following momentum.

And as I�ve previously mentioned, stocks are approaching super-heated conditions.

The S&P 500�s 14-day relative strength index currently reads 65.8 out of 100, less than five basis points shy of the overbought threshold. And the small-cap Russell 2000 Index is already overbought.

Breadth � or overall market strength � remains strong enough to keep forward progress moving over the next few months.

But with near-term momentum topping out, consider letting the market cool off a bit before getting aggressively long.

Follow these three steps and your portfolio may very well reward you with profits � and much sooner rather than later.

Courtesy of Jonathan Rodriguez, Wall Street Daily (More from Wall Street Daily Here)