Since the lows in March of 2020, the stock market has doubled. Think about that for a moment. The S&P 500 closed at 2,237 on March 23 of that year and closed Wednesday at 4,363, an incredible gain of more than 95% in 18 months. Numerous reasons have been cited, including the incredibly loose monetary policy that has been in place for years but went nuclear when the COVID-19 showed up in the winter of 2020. Toss in Reddit’s WallStreetBets crowd, which had government handouts to trade with while locked at home, and you had all the ingredients for the proverbial melt-up.
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The truly scary situation for investors is the recent 5% correction (which was the first in almost a year) once again brought out the buy-the-dip crowd, so it wasn’t a cleansing, shake out of the weak holders event. The sword of Damocles hanging over the market includes rising interest rates, Federal Reserve tapering due to begin soon, big increases in energy costs, ongoing supply chain issues, stagflation worries and Wall Street analysts that are not nearly as positive on the upcoming earnings seasons as they were for the second quarter. Add the debt ceiling and China worries, and the cauldron continues to simmer.

The difficult question for investors is what to do now? We have warned for the past couple of months that stock prices were very overextended. While all the ingredients are there to keep wind in the rally’s sails, it makes sense for more conservative investors to pivot to a safer stance.

Top Wall Street strategists like Barry Bannister at Stifel remain very concerned and feel that defensive positions are the best place to be now. While Bannister was targeting a big 10% 15% sell-off later in the year, one may well be underway now. Bannister has cited slowing liquidity, the potential for a continued drag on the economy from the COVID-19 variants and a host of additional negatives, like the ones we mentioned above. It makes sense to take some precautions right now and make some moves before all of the bids dry up, like they did back in 2020 in the first quarter.

Take Profits

Take profits and raise cash positions, especially on high-flying momentum stocks. These often included technology, biotechnology and similar areas. The FAANG stocks are emblematic of this silo. During big sell-offs, these stocks are the biggest casualties, because institutional accounts often have the biggest gains, and while they will not sell all their shares, they could easily dump a large position, especially if they face redemptions. When taking profits, see if there are stocks in your portfolio that are down that could be replaced with better ideas, or rebought after 30 days to avoid a wash-sale rule penalty.

For income and growth investors who need to keep a flow of income coming in, stick with the safest sectors. While they too will be subject to selling when the algorithm program selling kicks in, the damage inflicted will be far less than with the momentum and high volatility stocks. The best sectors to rotate to include consumer staples, utilities and real estate.
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Sell the Meme Stocks

By all means, sell any meme stocks that could be in the trading section of your portfolio. These companies are supported by the WallStreetBets retail investors that will run for the hills in a sharp sell-off. Many of them have limited capital, the average Robinhood account only has $6,000 in assets, and these investors cannot afford a prolonged and deep sell-off. Stocks like Gamestop, AMC Entertainment and even Chinese internet giant Alibaba could be eviscerated in a large correction.

Add a Hedge

Consider adding a market hedge to your portfolio. One of the most widely used across Wall Street is of course gold. The SPDR Gold Shares (NYSEARCA: GLD) is a good way to actually own physical gold without having to keep it in your safe at home. Plus, you can buy or sell any day that the market is trading the shares. Investors also can buy the VanEck Vectors Gold Miners ETF (NYSE: GDX) to own the top miners in the sector, many of which mine for silver as well.

Go to Cash

When anxiety gets to the highest point, investors can always sell and go to cash, but there are a host of negatives with this tactic. It would be a great idea if money markets paid anything. The highest yielding money market savings account pays a lousy 0.40%. Banks literally pay almost zero for funds held in checking accounts. One great idea for those with a touch of risk appetite is to buy a non-leveraged investment-grade ETF like the Invesco Bond (NYSE: VBF). The portfolio is focused on debt from top companies like AT&T and Corning, while also holding government Treasury debt.

The bottom line, like Bannister and other strategists like BTIG’s Julian Emanuel have alluded to, is that it is not a question of if a large correction could arrive, but when it comes. Those with any sense of stock market history are well aware that’s the case. Those who have been investors for years also know that, over time, the best long-term investment strategy is buying stocks of quality companies.

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