Preparing for a correction

First we need to define a correction: it is a temporary dip (about 5 to 20% down) but not a recession or a double-dip recession that will drag on longer and lose more than 20%.

1. Accumulate cash. I just halt buying any stock and have been selling stocks for several weeks as of 5/19/2011.

2. Prepare the buy list. It is based on:
a. the good (from my analysis) stocks that perform reasonably well,
b. the stocks that have performed very well even they're not classified as good stocks,
c. stocks in my previous buy list that have lost a lot of value - very careful here as they could go to 0, and
d. IVE, commission-free from Fidelity, if you cannot find enough stocks to buy.

My logic is that if they performed well and plunged due to correction, they will climb back. One's opinion.

3. Buy contraETFs - place 3% less than the market prices.
4. Sell covered calls for some stocks I already own.


This article will serve as a preparation list for future corrections.

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I also check the % they lose due to the correction. The more they lose, the better buy they can be. Again, one's opinion.

I've been right many times than times wrong in predicting a correction. I was wrong last time anticipating a correction. The recent best year is 2009 when I got about 80% return in my largest account. Every time there was a correction in 2009, I tapped into my house credit line and paid back after the correction. It is risky and I do not recommend leverage to any one.

The last anticipated correction had not been materialized. I missed some gains, but it is better to be safe. Market timing is not a science and market is not always rational.

There will be about 3 corrections a year. You cannot predict every correction correctly. However, you need to prepare for it and act accordingly. It is better to have a plan than no plan at all. In the long term, it pays off.


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Status.
5-26-2011. Have over 30% in cash. The market has been down by only 2%, so my prediction is currently beating the folks with 100% in cash. I count ContraETFs as double cash. Sold two covered calls.

6-1-11. About 40% cash. Sold about 5 covered calls. 50% is my target for now to Nov. 1.

6-7-11.
Off my accumulating cash phase by about 2 weeks to achieve 50% cash.
1. I count ContraETF as 2 times for cash, but it should be 3 times.
2. The market has been down about 5% for last 5 weeks. It is now can be classified as a mild correction.
3. Enter a lot of buy orders. They're about 5% to 12% less than the market prices. Hence, I do not believe some to be executed unless there is a big drop.
4. 'Sell in May and go away' works so far.
5. June is usually the worst month. However, this is the third year of presidential election cycle and is usually a good month. Commodities should always be down by this period.
6. Most likely, politicians will find away to increase debt ceiling as no voter wants to bite the bullet.
7. Will take a look at the bank stocks which have fallen a lot. They are still risky but quite good valued.

7-1-11.
The good news:
All expired covered calls net me with cash without selling the stocks.
USAP was bought for a good profit.

The bad news:
The rally started and continues. It is still a risky market as EU has intensified their debt problems with the 'fixes'. Will start maintain 30% cash and continue regular trading.
Glad I did not move to 100% cash as some did. The market never is rational.

(c) TonyP4 2011. Written: 5/19/11. Updated: 6/7/11.

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Disclaimer: All my posts are for informational purposes only. I'm not a professional investment counselor. Seek one before you make any investment decision.