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Canadian Market Due for a Correction?

Jason Ayres
January 25, 2011
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2 minutes read
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For the last several months, North American markets have been defying gravity. Not that they have really looked back since the 2009 lows, however the with the S&P/TSX Composite retracing the better part of 78% of its losses, the question becomes…how much further?

I was taught very early in my career not to “fight the trend”, but the other side of that is “don’t become complacent”.

The S&P/TSX Composite is a great benchmark for Canadian equities, encompassing many of the major sectors that make the Canadian markets tick. There’s an old saying that “when the tide goes out, all ships sink. I’m not suggesting that we are about to under go another catastrophic sell off, however a look at the daily chart, suggests that the trend that has been in force for the last 5 months is showing some signs of stalling.

VIEW CHART

A look at the VIXC – S&P/TSX 60 Volatility Index reveals that implied volatility is at a significant low. This suggests that options are relatively inexpensive compared to times in the market where there is presumed to be more risk. Purchasing protective puts on stocks that you have been profiting in is a great way to insure that you lock in those profits without limiting further potential upside. If the stock continues in your favour, you benefit from the appreciation in shares less the put premium. If the stock reverses, the appreciation of the put option will compensate for the difference. You can offset both the stock and the put, or use the profits from the put to buy more shares of your favorite stock at a lower price….dollar cost averaging with someone else’s money.

Either way, you will have the peace of mind to continue to “ride the wave” with a life preserver on hand.

Jason Ayres
Jason Ayres http://www.croftgroup.com/

Director

R.N. Croft Financial Group

Jason is a Derivative Market Specialist by designation, Director at R.N. Croft Financial Group and educational consultant for Learn To Trade Global.com. As a member of the Investment Review Committee at R.N. Croft Financial Group, Jason contributes as a market technician and derivatives strategist. In addition, Jason acts as Director of Business Development and is responsible for the overall management of all strategic and operational marketing and partner/client relationship activities. Jason is also one of the lead instructors for the TMX/Montreal Exchange.

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