My Top Investment Strategy for a Stalling Stock Market

The current stock market sentiment is bullish and based on the charts, there are indications that the market wants to go higher, especially technology and small-cap stocks. 

The S&P 500 is eyeing another record-high and it may just reach it by the time you read this. 

While stock market investor sentiment continues to display bullish new highs and new lows, there’s also a sense that the road to higher gains will not be an easy path. 

The economic renewal is maintaining a muted pace, in part due to the harsh winter conditions, but what if the economy was actually showing signs of slowing?

Jobs growth in February improved over January, but the jobs market still has not reached a level of self-sufficiency without continued help from the Federal Reserve via low interest rates. 

What I expect, after looking at the stock market indices, is that we will likely see new records broken on the horizon. (Read “Why I Believe the S&P 500 Could Easily Reach 2,000 in the Upcoming Months.”) However, the advance will be more hesitant than in 2013 and the past years, since the current bull market is into its fifth year and is very much absent of a major stock market correction, based on my technical analysis. 

Given this, I’m somewhat nervous, but there are alternative investment strategies you can consider at this time. 

If you feel the stock market may pause and trade in a sideways range through the spring and summer months, you may look at writing covered call options on some or all of your existing long positions that have associated options. 

In this way, should the stock market drift sideways, you would be able to generate some option premium income and reduce the average cost base of some of your holdings. I often use this simple strategy in my portfolio management, as it’s simple and cost-effective to undertake, especially in a stalling stock market that could rise. 

The important key is to make sure the strike price of your covered call option is not too low, otherwise you risk your underlying stock to be taken out (exercised) too soon. Set your strike price high enough to generate decent premiums, while also guaranteeing a nice selling price for your stock in case you are called away if the stock price rises to above the strike price. 

Another point is to make sure the expiry you select for your covered call makes sense and is based on your expectations. For instance, if you think the stock market will drift for the next few months, you could look at expiries after July or August. 

The most important thing to remember is that you need to be comfortable with the notion that you could be forced to sell your stock if it rises above the strike price.

This article My Top Investment Strategy for a Stalling Stock Market was originally posted at Profit Confidential