With global markets trending lower, Friday morning saw US stocks struggling to find direction as investors bought up beaten-down sectors in the aftermath of yesterday’s massive sell-off. Investors continue to remain cautious however, as the fear remains that we may be on the verge of a global economic slowdown.
A rise in the US dollar also indicates investors desire for risk management and safety in an uncertain market. As the flight to safety gathers steam, a drop in risk appetite could help to prop up the greenback, although a near-term correction may occur in the days ahead.
Trading is expected to be choppy today, and the trend is expected to continue going into Monday as the markets will be sensitive to news coming from Europe, with analysts calling for a possible mid-week relief rally. Ultimately, it will come down to investors feeling confident in their leaders’ ability to control the economy.
Feeling pressure to show action, central bankers and finance ministers from the G20 economies made the assurance that any and all steps that may be needed to calm the stress to the global financial system will be taken. This assurance lacked specifics, however, and the exact source of the funding for the IMF is unclear.
Accept The New Reality Of Investing In Today’s Markets: The Key To Risk Management
If you are waiting for the Greek debt crisis to subside, the global economy to revive, and the US government to get it’s act together before you invest your money in the stock market, then you will probably be on the sidelines for a while.
The fact is that today’s markets are going to be highly volatile, and investing in them will require nerves of steel. While there is no end in sight for the markets’ wild swings, there are ways of investing in this atmosphere that can help you mitigate your downside risk, and realize greater profits.
Now may be the time to explore options trading as a risk-management strategy. Options can serve to insure your portfolio against unfavorable market swings, as well as allow you to profit from these conditions. By utilizing call and put options, you are effectively lowering your overall risk, while maximizing potential profits.
For buy-and-hold investors, exploring a long call option for a desired security may be the wisest course of action given the market’s extreme volatility. When you purchase a call option, you gain the right but not the obligation to purchase the stock of a predetermined company at a future date, at a price that is determined today.
The risk in utilizing options for trading is the loss of the entire premium, either due to the expiry of the option, or due to the failure of the stock to reach the preset price. As the premium is a fraction of the contract price, this strategy is useful for investors who would like to purchase a security for investment purposes, but does not currently have the funds on hand.
For the purpose of risk management options can act as a form of portfolio insurance, as purchasing a put option allows you to profit from the market’s decline. A put option is simply the right to sell the stock of a predetermined company in the future at a price that is determined today. Once again, your losses are limited to the cost of the premium, and these options could help you realize profits in down markets.
Strong Company, Strong Returns
Nike (NKE) rose 5% before the opening bell after reporting 15% growth in its fiscal first-quarter profit, beating analyst’s expectations, and reflecting the demand for their products in almost every market worldwide. In light of upcoming events such as the Olympics and March Madness, growth is expected to trend upward for the rest of the year.
Nike’s impressive earnings growth is also exceptional considering economic conditions, macro concerns, and negative mall traffic. Analysts have also concluded that there are positive indicators going into the holiday season based on back-to-school sales.
Nike also boast a nice dividend (1.24 or 1.39%), making it one to consider for your portfolio. Nike and a handful of other companies such as Starbucks and McDonald’s have managed to successfully grow in an environment where consumers are becoming increasingly more conscientious in terms of spending.
This appears to be signaling a willingness on the part of consumers to spend money on their favorite brands if they feel good about the quality of their purchases. Look for opportunities in these types of companies as part of your risk management strategy.