Stocks are rebounding to kick off the week. But if you’re like me, you can’t shake off the feeling that Friday’s selloff was more than just a one-day event.

Today, we’re going to talk about what COULD happen to this overbought market as we head into an important earnings season. And I’ll share some important tactics for PROTECTING the gains you’ve worked so hard to accumulate this year.

[Here’s a quick snapshot of how my account is positioned. I’ve got way too much cash, but that’s not a bad thing as volatility re-enters the market.]

It’s not just about China

Friday’s selloff was primarily attributed to Trump’s threat to impose an additional 100% tariff on China. The president also threatened export controls on “any and all critical software” with an implementation date of November 1st.

After hitting a new intra-day all-time high, the U.S. stock market reacted very poorly to the news. Stocks fell sharply and wound up posting their worst day since April… (a time when investors were reeling from Trump’s initial volley of trade tariffs).

Today (Monday), markets are clawing back some of Friday’s losses as Trump walks back some of Friday’s threats. But despite the green on our trading screens, it’s important to understand the new level of risks and volatility that are now in play.

Let’s take a step back and look at the broad market’s path this year… Notice how steady the market’s advance has been ever since we bottomed in April and began trending higher in May. In particular, notice how the S&P 500 hasn’t closed blow the 200-day moving average or the 5–day moving average (blue and green lines respectively in the chart below) since early May!

(Click on image to enlarge)

Perhaps more impressively, the S&P 500 closed more than 11% above its 200-day moving average last Thursday. Investors have confidently bought stocks hand-over-fist for weeks and weeks without any major pullback. And this type of action in the market can lead to complacency.

When too many investors feel overly confident, bad things can happen.

Any catalyst (like a new set of tariffs, a poor earnings announcement, or a disappointing economic report) can quickly shift the overall tone of the market. And a pullback to the market’s 200-day moving average — while historically a normal occurrence — can be particularly painful.

With so many traders and investors holding positions with significant profits built up, a break of the market’s 50-day moving average could trigger a mini-panic and drive stocks sharply lower for a week or two.

So with Friday’s selloff acting as a warning sign for us, I want to make sure your portfolio is prepared.

Below are three tactics you can use to help preserve your hard earned gains even if the market experiences a sharp pullback over the next few weeks.

Raise a Tactical Allocation to Cash

We’re currently in a bull market. And during bull markets, we like to give our positions room to run. But that doesn’t mean we should be irresponsible!

Selling part of your position can be a great way to lock in gains and manage your risk. By selling a fourth, a third, or even half of your position when the market is overbought and extended, you can reduce your risk. That way if the market pulls back, your losses will be smaller.

Another great advantage of this approach is that you’ll have extra cash you can use to buy back shares at a cheaper price when your stock pulls back. Or you may choose to buy a different stock. This is why it’s a great idea to have a watch list of stocks that you’re ready to buy if the price pulls back unexpectedly.

A quick word about taxes here…

Last week I talked to a few investors who have large profits accumulated. More than one mentioned they didn’t want to sell because they didn’t want to trigger a tax liability.

Unfortunately, I know several friends who had hefty profits in exciting stocks and made the same decision not to sell (for tax reasons). Over time, their gains evaporated as the stocks pulled back. The good news is my friends didn’t have to pay exorbitant taxes on their gains. But the bad news is that those gains disappeared.

Never make a poor investment decision so you can save on taxes!

Precious Metals are a Good Hedge

My trading software was full of red on Friday as stocks across multiple industries traded sharply lower. Quite frankly, I was surprised to see that the value of my account was holding up relatively well, despite the carnage spreading through the market.

My saving grace was a significant allocation to gold and silver positions. Both traded higher, helping to offset losses in other areas of my portfolio.

Gold and silver tend to be viewed as “safe haven” assets during times of market stress. investors were clearly selling risk assets and reallocating proceeds into precious metal plays. This helped to push gold and silver prices higher — a trend that will likely repeat during market pullback periods in the weeks to come.

Rising inflation and an overall bearish dollar trend has helped to drive gold prices higher. As the dollar weakens it takes more “weak dollars” to buy commodities like gold. So there continues to be a secular tailwind behind gold helping to drive prices higher.

The prospect for lower interest rates also creates more of an incentive for investors to hold gold.

If yields on treasury bonds and other interest-rate sensitive assets fall, there is less of an incentive to hold yield-producing investments. This leaves gold with less competition.

Add it all up, and this continues to be a healthy environment for gold and silver with plenty of room for prices to continue to run.

Buy Puts! (For Insurance, or Outright Gains)

It frustrates me that most investors only play one side of the market…

The majority of investors only bet on stocks trading higher. Which works well during bull markets, but leaves investors with unacceptable losses during challenging periods.

In today’s market, there are many stocks that are overvalued, overbought, and extremely vulnerable.

These are the names that are likely to fall sharply when fear re-enters the market.

Buying put contracts on these stocks can be extremely lucrative. These contracts increase in value as stock prices fall. And since high-valuation speculative names tend to fall very quickly when they implode, put contracts can generate huge returns in a short period of time.

A few hand-picked put contracts can be used as de-facto insurance contracts (hedging the value of your existing investments). Or they can be used as speculative trades to generate profits from the next leg lower for specific stocks.

Regardless of which tactic you use, please make sure you’re implementing a strategy to PROTECT the value of your investments.

The U.S. stock market has had a great year, giving investors plenty of opportunities to generate profits. Be sure to protect those profits instead of giving them back when the market becomes more volatile.

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