Actions to Take If the Market Rallies Soon

You don’t want to be sitting on your hands if this market shifts gears into a major rally.  Here are 3 actions you can follow to get prepared to trade:

1. The first action you should take as an investor to keep a close eye on the financials, especially Citigroup and Bank of America.  If these two stocks start to stabilize, it should be an indication that many of the problems ailing our markets have been priced in or are on the path to recovery.  These two banks are exposed to falling home prices, mortgage-backed securities, credit default swaps, commercial real estate, near-term debt flows, etc.

2. When the credit markets reopen, the stocks that are most likely to appreciate the greatest are companies with high debt levels.  We like a blend of strong fundamental businesses, positive cash flow and a manageable amount of debt.  Hundreds of companies fit this description.  Some of our favorites include Dow Chemical (DOW), Superior Energy Services (SPN), Intrepid Potash (IPI) and McMoRan Exploration Co. (MMR).  You should be buying call options on these types of stocks with expirations in March or later of next year.

3. A third action you should consider is to sell the puts in the companies that you like to take advantage of the historically high option volatility levels.  (You may want to consider Procter & Gamble (PG) or Johnson and Johnson (JNJ).)  These are strong, stable companies that -- if you are put the stock -- you can take ownership of at an attractive price and can be a solid, long-term portion of your equity portfolio going forward.

With the government taking a strong stand in supporting Citigroup with a $20 billion capital injection and guaranteeing over $300 billion worth of potentially toxic assets, the debt markets have been put on notice that we will not let our biggest banks fail. Obama is beginning to fill out his team and discussing even heartier stimulus programs which may even include more and faster tax cuts. The collective actions of the government and the fresh vigor the new administration should help restore confidence and credit flows. If we play the odds, this is the time to get long.