Put options and short selling are included here because they can be used for hedging in response to a negative January Barometer signal instead of selling stocks and stock call options. Selling stocks and stock call options for any other reason should be postponed until the first trading day before the 7th (timing).
To reduce risk, negative January Barometer signals must be honored. The easier way is to sell all investments on the first trading day before April 19 and make no investment until the first trading day before October 26 (timing). However, it might take many months to restore your investment exposure to the previous level.
The better way to reduce risk is to hedge all investments with put options or short sales, starting on the first trading day before April 19. All hedges should be removed on the first trading day before October 11.
The potential loss on an option is limited because the premium never goes below zero. However, the premium reduces potential profit.
Short sales do not have a premium, but are riskier than put options because potential losses are unlimited. There are other problems with shorting:
The hedges must be carefully chosen. If the hedges underperform there might be a net profit even if the investments decline. However, if the hedges outperform there might be a net loss even if the investments rise.
In traditional hedging a stock is protected with put options on the stock. However, the underlying stock in the option cannot underperform because it is the same as the stock being protected.
Hedging each investment with a direct competitor or a sector index fund would be better. However, related securities track each other closely, so this is little different than traditional hedging.
A practical way to hedge is with stocks expected to underperform the market. The hedges need not bear any relation to the investments. To minimize risk, the hedges should be diversified.
To reduce risk, trend reversal selling signals in your investments must be honored. It is not necessary to check for trend reversals in your hedges. Hedges are closed only to restore neutrality (lists) or when the January Barometer defensive period ends.
Do not use stop loss orders to ease the process. They tend to execute badly. Instead, check for a reversal (-26% from the top of the uptrend) each month just before the first trading day before the 7th. Sell any stock that has developed a downtrend and any call option for which the underlying stock has developed a downtrend.
When there is an acquisition offer, the stock of that company plateaus. Do not continue to hold the stock or a call option on the stock because there is little upside potential.
Call option purchases are confined to the master list, which comprises only stocks with LEAPs (long-term options). These LEAPs expire on the third Friday of January.
You can close call options before the underlying stock is delivered to you. Sell on the first trading day before January 7, which is well ahead of the expiration day.
You will close all put options on the first trading day before October 11, when the January Barometer defensive period ends. This is months before you would be obligated to deliver stocks.
Cash can be withdrawn from a Regular brokerage account without penalty. There will be tax consequences if it is necessary to sell securities to raise cash, so it is usually best to sell your biggest losers.
Withdrawals from a Traditional IRA or 401k will be taxed and will usually be penalized. Roth contribution withdrawals will not be taxed or penalized, but earnings withdrawals will usually be penalized. Roth 401k earnings withdrawals will be taxed and all withdrawals will usually be penalized.
A Traditional or a Roth will not allow borrowing. A Regular brokerage account will allow borrowing if it is a margin account, but the interest rate might be exorbitant.
Most employers allow borrowing against a 401k or a Roth 401k. The market rate for interest will apply. However, the loan must be repaid upon termination of employment. After 60 days from the time you quit or are terminated, it is considered a withdrawal and is subject to a penalty.
In a Regular brokerage account, you can sell investments showing paper losses to establish tax losses. Selling will not establish tax losses in any kind of individual retirement account.
Sell on the first trading day before September 7. To ensure you will not create a wash sale do not purchase in September any stock or option sold for a tax loss, any option for which the underlying security was sold for a tax loss, or any stock that was the underlying security of an option sold for a tax loss.
Selling in September is advantageous. You will have reduced your investment exposure during the weakest part of September, which is the weakest month of the year (timing).
If one of your investments has increased enough to significantly reduce diversification, the amount held should be reduced. A good rule of thumb is you should sell half of any investment position that is more than twice the current tranche size. Assume the market exposure of an option is half the market value of the underlying security (buy).
Rebalancing can be a tool for cash management. It can be used to raise cash, even if the position is a little less than twice the current tranche size. If there is no need to raise cash, rebalancing can be postponed until the position is as much as three times the current tranche size.
Rebalancing can also be a tool for tax management. It can be used to establish a capital gain in the current year, even if the position is a little less than twice the current tranche size. It can be postponed until a short-term capital gain becomes a long-term capital gain. Or it can be postponed until the following year if this would result in more favorable tax consequences.
Some people take profits because they fear the profits might evaporate. There is a popular Wall Street saying: "You can't go broke taking a profit." However, you can go broke if your losses are greater than your profits.
A better Wall Street saying is: "Cut your losses and let your profits run." Ignore the caveat that "pigs get slaughtered." Profits are likely to grow because trends persist.
Some people take profits because they want a high percentage of winning trades. These people also refuse to sell a falling stock, hoping it turns around and becomes profitable. But the stock is likely to continue falling, because trends persist. Paper losses are just as destructive as realized losses.
With small gains and large losses, you might not make money even if your winning percentage is more than fifty. But with large gains and small losses, you can make money even if your winning percentage is less than fifty.
In a similar vein, do not protect profits. The purpose of hedging is to reduce risk by preserving capital, not to preserve wins.
Some people take profits so they can "play with the house's money." However, they are unlikely to find more attractive investments than the ones that gave them the profits.
Do not respond to local, state, national, or international news. Do not respond to news about a company, industry, or sector. Do not respond to news about wars, popular uprisings, or natural disasters.
There is no way of knowing how a security will react to news. Sometimes there will be a strong reaction, but sometimes there will be no reaction. Sometimes even if it is clear current profits will be affected, long-term prospects will override short-term considerations.
There might have already been a reaction because the news was anticipated. If not anticipated, there might be a reaction that plays out before you can act. Any reaction could be partially or completely reversed if consequences are overestimated, or could be followed by a continuation if consequences are underestimated.
Manipulators can leak good news to boost a stock they own or leak bad news to drive the price down because they are short or wish to buy at a bargain price. Even worse, the "news" is sometimes nothing but a false rumor.