The newest version of a market correction is underway. Still, with all the handwringing and shrill voices the decline is fairly modest to this point.

As of Wednesday’s close the S&P 500 is down just over 4.7% since early April, Dow is off 3.5 % and NASDAQ down 6%. Even gold, silver, oil and commodities have taken it on the chin.  More of the same may lie ahead because serious problems continue to unfold in Europe and the U.S. economy remains anemic, to put it mildly.

I believe we’re  well positioned to ride out this correction, particularly if it’s short term in nature. If more needs to be done to protect our account values I will not hesitate to take action. See below for steps already implemented.

Preservation Growth (Most Conservative)

This account remains heavily invested in bond ETF’s, roughly 40% of the total portfolio. Why is this a good thing? Because high quality bonds usually rise in value during stock market corrections. Not always, but usually. And they have been gaining in value throughout this correction.

In addition, this account owns relatively conservative stock exchange traded funds. (ETF’s).  ETF’s that hold utility companies like Duke Energy and consumer companies including Coke and McDonalds. These stocks tend to give ground grudgingly during market declines. And they’re doing just that.

We also own a large position in one of my long time favorites, the lower risk Vanguard Wellsley Income mutual fund, symbol VWINX. It posted positive returns in 9 of the last 10 years, 2008 being the only blemish on its record. Even then it declined ‘just’ 9.84% compared to a loss of 36% on the S&P 500.

And finally, we have a 25% cash position, poised to buy at discounted prices when this correction has run its course.

Prudent Growth (Moderate Risk)

This account owns a stable of dividend paying stocks, a 20% position in bond funds, and a 20% cash stake. The stocks are primarily household names including but not limited to Coke, McDonalds, Microsoft , Raytheon, symbols KO, MCD, MSFT, RTN respectively.

In addition I bought a leveraged inverse energy ETF a few days ago. Remember an inverse fund performs opposite its underlying index so of course its’ done remarkably well since purchase.

Value Plus (Most Aggressive)

This account mirrors Prudent Growth to a degree. It owns many of the same stocks but that’s where the similarities end. It holds no bond funds, nor would I expect it to in the future. Under most scenarios bonds would not provide the performance I’m looking for in this, our most aggressive and highest risk account.

It also holds a 30% position in leveraged ETF’s, purchased a few days ago. The ETF’s are Direxion China, Direxion Energy, and Direxion Semiconductor, symbols YANG, ERY, and SOXS respectively. Caution: These funds are not for the faint of heart.

They are all inverse funds and extremely volatile! They can and do rise and fall by double digit percentages in a day or two. Because they’re inverse funds they are doing very well in this correction.

I use these funds primarily as a hedging strategy for Prudent Growth and Value Plus accounts, and secondarily for short term gains. They are usually held only a matter of days and sold early in a market recovery.

And now for ‘Like Water, Go With the Flow’. This comes from one of Bruce Lee’s most remembered quotes. It describes an important part of my overall investment philosophy and strategy.

Click below for short Bruce Lee clip:

http://www.youtube.com/watch?v=46jO96bz_Fo

After building the core portion of each portfolio with stable, “All Weather” types of investments I use a “Trend Following” strategy to position the remainder of the portfolio in market sectors in an uptrend.

For example if precious metals are trending up I’ll buy silver and/or gold. If oil is moving, I’ll buy oil. Currently the markets are in correction mode so I bought investments moving in the opposite direction, the inverse funds described above. To paraphrase the great Al Thomas, “Don’t buy it if it isn’t going up!”

You may note I haven’t said much about future market direction as so many prognosticators tend to do. That’s because in the short term I have no idea what direction the markets may take, and neither do they.

Instead my overriding philosophy and strategy is to, like water, go in the direction of least resistance, i.e. market flow. If the markets are moving lower I’ll take steps to protect values and even profit by owning bonds and inverse funds. When the markets begin moving higher I’ll sell the inverse funds and use cash to buy investments moving higher.

That’s all for now. If you or someone you know is in need of an investment management strategy that puts protection first, feel free to contact me, or pass this bulletin along. Also, feel free to offer comments or ask questions at any time.

That’s right, it really doesn’t matter. It doesn’t matter what I say or think, what the pundits say or think, what any of us may say or think. What matters is reality, and reality is a stock market going up in nearly a straight line since December. (Click chart to enlarge).

Remember the many times over the last couple of years I said we were still in a ‘Bear Market’ and experiencing what is often called a Bear Market rally? Well the trouble with that and all labels for that matter is they may have nothing to do with reality. And reality says the domestic stock market as measured by the S&P 500 and Dow Industrials has just about doubled in value the last three years. So you see what we believe to be true may not be even close to reality. And this can sometimes cost us dearly.

So the moral of the story is the markets themselves tell us much more than the so called experts, pundits, talking heads and over the top former hedge fund managers.

We own a stable of high quality dividend paying stocks including McDonalds (MCD), St Jude Medical (STJ), Microsoft (MSFT), Coca Cola (KO), Raytheon (RTH), and others. That stock market risk is counter balanced by the real estate mortgage exchange traded funds (ETF) and inflation protected mutual funds we own.

Most of our holdings are dividend payers, a strategy that has served us well and a strategy making a comeback with ‘small’ investors and institutions too. You may remember the days when dividend payers were shunned because so many were chasing the glamour of technology and internet stocks.

As I’m sure you know ‘Baby Boomers’ are retiring in record numbers and seeking supplemental income to finance the ‘golden years’. Bank CD’s and other income generating investments won’t be enough to spend those leisure years playing golf and jet setting around the globe, let alone pay the rising costs of energy, medical expenses etc.

Anyone relying on low interest rate bank CD’s and treasury bonds means that after taxes and personal expenses those investors and savers will likely be going broke over the next 20 years. Going broke slowly, but broke nonetheless. Alternatives like dividend paying stocks, REITS, gold/silver, and income annuities should be part of one’s portfolio to assure the retirement lifestyle turns out as planned.

Disclaimer: The above ramblings in no way constitutes recommendations or strategies to follow. The securities markets entail risk.

“I’m late, I’m late for a very important date.” So said White Rabbit in ‘Alice in Wonderland.’ I too am late and I apologize. I think it’s a combination of tax season being very busy and ‘writers block.’ So here we go.

The Markets

The domestic stock market as measured by the major indices (Dow, S&P and NASDAQ) are off to the best start in years. Let’s take a quick look and then do some dissecting.

For performance measurement and tracking I sometimes use exchange traded funds (ETF’s) as proxies for the major indexes. (SPDR Dow Jones for the Dow 30 Industrials, Power Shares QQQ for the NASDAQ, and SPDR S&P for the S&P 500, symbols DIA, QQQ and SPY respectively). Year to date DIA has gained over 6%, QQQ 16% plus and SPY more than 9%. (1/1/12 – 3/9/12) Climbing a ‘wall of worry’ is what the markets have done best for many weeks now.

So just what is carrying the markets to higher highs with nary a pullback in recent weeks? Well, it could be a tepidly recovering economy and reviving consumer confidence. Or maybe it’s the Greeks finally beginning to get their financial house in order. Wait, could it be the Europeans coming together and singing Kumbaya around the toasty campfire?

Or, maybe it’s magic. Magic whipped up by the ‘Wizard of the Fed’, otherwise known as Ben Bernanke. You know Grandfather Ben, he of the professorial face of wisdom and the seemingly endless supply of money. Maybe that money being created out of thin air has something to do with the magical levitation of the stock market.

I know, I sound like a skeptic of the highest order. And maybe I am. It’s probably due to my having a difficult time believing in the staying power of the markets when I look around and see massive unemployment, rising prices at the grocery stores and gas pumps, the housing market still in the doldrums, and a political system getting ready for a turn on either a hit comedy show or one of those make believe reality shows.

But real life does go on, and we must do what we can to protect and grow our assets. So I continue to search out good values and to that end I have been doing some selective buying lately. Below are some recent transactions and the strategies behind each.

Analysis of a Buy

I bought CSX March 8^th @ $20.83. I’ve been looking for a stock that will tend to do well in a recovering economy, even though the economy is far from out of the woods. Of course it had to meet my additional criteria of being underpriced, a strong record of past performance, and in the beginning stages of an upward move. CSX meets most of the criteria so it became a buy.

CSX Corporation Performance 2002 – 2/29/12

2002  2003  2004  2005  2006  2007    2008  2009  2010  2011      YTD

-18% 28%    12%    27%   36%    29%    -24%   52%   35%  -0.51%    0.33%

From Morningstar.com (Performance numbers rounded down)

From Morningstar: CSX is a $11.7 billion railroad operating in the eastern United States. On its 21,000 miles of track, CSX hauls shipments of coal products (32% of consolidated revenue), chemicals (14%), intermodal traffic (12%), and a diverse mix of other merchandise.

Autopsy of a Sell

I bought Pepsico, symbol PEP, on 11/15/11 for $63.70 per share. It went to a high of $66.74 before moving lower and basically flat lining until sold for $63.89 on 2/9/12 for a miniscule loss after transaction fees.

So why did I sell? A number of reasons. First, it was our weakest holding in a strong market. Second, we owned and still own a couple other consumer companies including Cocoa Cola and McDonalds and they’ve been doing far better than Pepsico. So the decision was made to sell and put the cash to more productive use.

Hindsight has proven cutting PEP loose was a good decision. Since our sale it has gone absolutely nowhere while the markets and our other holdings have performed very well.

All three of our risk levels, Preservation Growth, Prudent Growth, and Value Plus are value oriented in philosophy and strategy.

Definition of ‘Value Investing’ from Investopedia

The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company’s long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.

Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields. (My Bolding)

Read more: http://www.investopedia.com/terms/v/valueinvesting.asp#ixzz1okPzXC8c

Note: All our stock holdings were purchased using the above criteria and nearly all pay dividends of 2% or greater annually.

As always feel free to contact me with any questions or concerns you may have.

Disclaimer: None of the above constitutes a recommendation(s) for buying or selling securities, nor a particular strategy to follow. The securities markets entail risk.

Volatility Chart

Volatility has spiked in recent days as demonstrated by the four indices I track on a daily basis. First of course is the CBOE index, symbol VIX. (Click chart to enlarge) illustrating the move from 17 to 20.79 currently.

Below is Friday’s performance of a few selected securities/indices related to this return of volatility.

Symbols Gain 2/10/12

• IWM 3/30 82 Puts +20.55% Put options Russell index
• UVXY +17.10% ProShares volatility ETF
• TVIX +17.04% Velocity Shares ETN
• VIX + 8.58% CBOE volatility index
• INDZ + 4.99% Direxion India Bear ETF

(The above securities are extremely volatile and should only be used with great caution and a well developed trading plan)

I recently bought the two in bold and although both performed very well in hindsight my choices could have been better. My thinking on INDZ was based on its history in both up and down markets. I expected it to be up big in this ‘mini’ correction. It performed well Friday but was outperformed by a few other leveraged ETF’s. Oh well, ‘best laid plans of mice and men’ well, you know the rest.

The markets have been relatively stable for a few weeks, moving up in nearly a straight line since mid December. See S&P 500 Chart. But now, with turmoil in Greece back in the headlines a change may be in the offing, at least short term.

I’ve made a few modest changes to our accounts since my last bulletin. I sold Pepsico, symbol PEP. Our accounts have been a bit overloaded with defensive issues so with PEP underperforming something had to give.

I’ve also begun a transition away from bonds in our most conservative accounts. I began with the sale of iShares 7-10 year treasuries, symbol IEF, a short term treasury ETF. With rates so low there is minimal likelihood of capital appreciation and yields remain at very low levels.

The bonds will be replaced by higher yielding securities including Capstead Mortgage, symbol CMO, purchased recently. Capstead is a company that buys and manages mortgage backed securities and has a stellar record over many years. It’s currently yielding just over 13%.

At this point I’m not overly concerned about volatility. A modest correction is a healthy thing, particularly so after the big run we’ve had the last few weeks.

We own a stable of great dividend paying companies and they continue to meet our expectations. As market corrections unfold I’ll continue to buy more with the store of cash still at our disposal.

At the same time I will adhere to our ‘stop loss’ rules and during market corrections potentially take inverse ETF positions as deemed necessary. Above all our mandate is to protect capital and secondarily look for opportunities.

Disclaimer: None of the above constitutes a recommendation(s) for buying or selling securities, nor a particular strategy to follow. The securities markets entail risk.

We’re off to a rousing start this year, the so called ‘January Effect’ in full bloom. This run has been nearly uninterrupted as illustrated by the major indices, S&P 500, Dow 30, and NASDAQ all up since mid December 7% or more. But if 2012 is anything like last year with it’s many corrections, then now may be a good time to consider shorting the market.

None of the indicators I track are flashing red yet but this idea of an imminent correction is based on experience, history, and human behavior. Human behavior that includes taking profits after a big run, which leads to at least what I call ‘mini’ corrections. As long as we follow a rational plan there is opportunity to make money during corrections.

My preferred method of shorting the market is to buy inverse exchange traded funds (ETF’s). An inverse fund is designed to do the opposite of what the underlying market indexes are doing. For example symbol SH, one of the S&P 500 inverse funds, has declined 4.5% so far this year while symbol SPX, the long S&P 500 fund, has gained 4.8%. This effect is magnified if using leveraged ETF’s but that’s a discussion best left for another day.

So while relishing the great start we’ve experienced so far let’s all be aware that what the markets giveth they may take away, sometimes in an eye blink.

The foregoing in no way is a recommendation(s) of securities to buy or sell. Investing in the securities markets entails risk.

As January goes, so goes the year, or so market history tells us. I know it’s early but by that metric we’re off to a solid start for the month. The S&P 500 and Dow 30 are up nearly 2% as I write, and the NASDAQ has gained over 2%. Ah but lest we become complacent remember volatility lurks beneath the surface, ready to upset the apple cart at any time.

Last year was the most volatile period we’ve experienced in a very long time and we could be facing a repeat this year. Many of the uncertainties remain. European problems, our own massive budget deficits at the state and federal levels, a topsy turvy election year, stubbornly high unemployment.

On the other hand there are a few positives. Companies have begun hiring, albeit in small numbers so far, corporations are flush with cash, stocks are reasonably priced by most valuation measures, and there is cash in the hands of institutions to buy stocks.

So what will it be? Another year of gyrations with little market progress like 2011, a year of significant gains like 2010 and 2009? Or a disaster on the scale of 2008?

There is of course no way to answer those questions. But if nothing else the last ten years have prepared us for the unexpected and hopefully enlightened us to alternative methods of investing.

The days of ‘Buy and Hold’ and high expectations are past history for most of us. Our techniques for some time have included using technical indicators to help us understand when to be fully invested and when to become defensive. We are currently heavily invested across all portfolios but retain a healthy cash position for our moderate and conservative risk accounts, ranging from 25% to 45% depending on account risk level.

We continue to own quality dividend paying stocks, still heavily in bonds for the most conservative accounts, and a new gold position for higher risk accounts.

Caution: The above is in no way a recommendation for securities purchase or sale, or investment strategies to implement. So be careful out there, investing in the securities markets can be hazardous to your wealth.

The ‘bear’ is stalking the markets and the ‘bull’ is nowhere to be found. We’ve been in a ‘noisy’ (volatile) bear market since the first of May and the outlook does not look promising.

The financial crisis in Europe continues, gridlock rules the day in Washington, true unemployment is assuredly higher than government tells us, sentiment is negative, the list goes on.

The question is, how do we navigate our way forward from here? My answer, with caution.

More specifically, we continue to own and buy high quality dividend paying stocks, short and intermediate duration bonds, and more than a dash of cash.

Our portfolios include a who’s who of mega brand names including Coke, McDonalds, Pepsico, Raytheon, Home Depot, Berkshire Hatheway, new addition Microsoft, and other companies of similar pedigree. All are very large, financially sound companies and all, with the exception of Berkshire, pay attractive dividends. We may as well get paid while awaiting the markets recovery.

In addition I’m buying leveraged exchange traded funds (ETF’s) for short term holds, both in market rallies and corrections. I use Direxion and ProShares leveraged ETF’s to take advantage of short term moves that have been occurring with regularity. This has been moderately successful so far and has led to portfolio preservation during the more radical market sell offs.

I believe my skills in short term trading are improving and should result in enhanced performance as we move through these times of uncertainty. My in depth study of the great traders has provided education in an area of investment management I’ve not visited in the past, at least not in depth.

Be careful out there. We are in a very difficult investment climate. Feel free to contact me with any questions or concerns you may have.

The above is in no way to be construed as investment advice or recommendations. The securities markets entail risk and potential loss of capital.

Is Santa on the way with a year end market rally? Many signs point to just that. And we’ll need a year end rally to get most market indicators in the black for the year.

As of this writing the S&P 500 is barely showing life, up just 0.89% YTD. NASDAQ is still down -1.01% YTD, and the Russell Small Company index is off more than 5%. One of the few domestic indexes in the black this year is the venerable Dow Jones index, up nearly 6.5%.  (Performance numbers courtesy of morningstar.com)

And the foreign markets? Fuget about it. There’s a sea of red wherever you look, from Asia to Europe, red numbers in double digits.

I’m continuing to build our value oriented portfolios by loading up on high quality dividend paying stocks as these sell offs play out. I’m like a kid in a candy store when these sales occur, and they’re happening with greater frequency and severity.

Those gems filling our shopping cart include companies that produce the staples and basic neccessities of our lives. Oh yes, I’ve even purchased a couple of the worlds greatest fast food companies but then we all need a Big Mac and Coke from time to time, right? In addition I’ve bought and continue buying companies that pull our basic materials out of the ground. Iron ore miners, crop fertilizers, energy and precious metals, all in our cart with more on the shopping list.  

And how do we protect ourselves from these short term market whiplashes? It’s not easy but my method of choice is to buy inverse exchange traded funds (ETF’s) for short term holds. These inverse funds are designed to move in the opposite direction of their underlying indexes. Indexes like the Dow, S&P, Russell Small Company for example. So when the markets go into free fall these types of funds go up.

I hold them in tax advantaged accounts like IRA’s wherever possible until the markets right themselves. The reason for using tax advantaged accounts is to avoid incurring taxable events on the sales. There have been many of these short term buys and sells this year and they’ve gone a long way in protecting our capital. And after all, protecting our capital, particularly through these dangerous times, is Job One.

Be careful out there. We are living in the most turbulent times and face the most risk to our long term financial security than I’ve seen in my 31 year career.

Caution: The above is in no way to be construed as investment or financial planning advice. The securities markets entail risk.

Another speed bump last week on the way to positive returns for the year. About the time markets were beginning to look past Greece another problem appeared, namely Italy. Wednesday was quite volatile and erased 400 points from the Dow Industrials average.

The reality is Italy and a number of other nations, including the U.S., have faced and continue to face very difficult problems. The accumulation of debt over the last three decades at all levels, government and individual, threatens to overwhelm the feeble efforts employed so far to put the financial house in order.

We have fared relatively well to this point. Our Conservative and Moderate risk accounts are in the black for the year to date. Our Value Plus equity account is just slightly in the red, and our non public trading account has made a heroic recovery and performing well.

I remain convinced we are in a Bear market as illustrated by my go to indicators. The degree of descent is not steep at this time but we are still below the August highs on the S&P 500, which were below the April highs.

The above notwithstanding I continue to find what I see as undervalued stocks and very selectively buy them. Case in point is a recent purchase of Raytheon, symbol (RTN). Raytheon is a 25 billion a year defense contractor and sports a hefty dividend of 3.5%. 

I also took some defensive positions recently including Direxion Financial Bear (FAZ), ProShares Ultra Short Europe, (EPV), and ProShares Ultrashort Financial (SKF). These are all inverse exchange traded funds, (ETF’s) designed to go up when their underlying indexes go down. They are extremely volatile and in my opinion best used for short term holds. But they can provide a sort of ‘insurance’ in volatile markets.  

Disclaimer: The foregoing is in no way a recommendation of securities to buy or sell or stategies to employ. The securities markets entail risk.

In spite of continuing financial problems in Europe, the moribund world economy, a stubbornly high U.S. unemployment rate, deadlocked Congress, stock markets of the world for the most part had a banner October.

(Click chart to enlarge). The 10 month simple moving average (SMA) line has flattened a bit but still indicates bear market territory, in spite of the October rally. Historically the 200 SMA turning down has indicated the onset of a bear market. (10 month SMA and 200 SMA are used interchangeably). 

We’ve seen this story play out before. Rallies in the middle of bear markets are not unusual and to be expected, even powerful ones like October.

If not for the last two days of selloff the S&P 500 would likely have had a record month. Even with that late correction the index blasted higher by nearly 11 % in October. Additional evidence we should pay more attention to market charts than economic and political news.

Whereas the last quarter has historically been a great month for investors we should not become complacent. In this time of economic and political turmoil, coupled with extremes in volatility, we must remain vigilant and not necessarily expect the usual outcomes in these unusual times.

We continue to fare relatively well, in the black across most of our various risk level accounts. We currently maintain three publicly offered risk levels ranging from quite conservative to a 100% equity strategy encompassing greater risk.

We’re still heavily weighted in cash, using the pullbacks to buy high quality companies. Recent purchases include symbols ITT and BPT for moderate and aggressive risk investors. To overcome the extreme declines we at times have taken inverse exchange traded fund (ETF) positions. Inverse ETF’s are designed to move in the opposite direction of market indexes. 

So as always be careful out there. We live in turbulent times and job one is to protect ourselves from undue risk.

Note: The forgoing in no way is a recommendation to buy or  sell securities or follow specific strategies. Investing in the securities markets entail risk.