3 Investment Traps for 2011

If you think you've missed a trend, take a deep breath and wait a few weeks before giving in to the urge to buy. Retail, consumer discretionary, technology stocks and precious metals have rallied big against a backdrop of questionable fundamentals. Retail stocks are at an all-time high – yes, even higher than in 2007 – even though unemployment there are more than twice as many unemployed Americans as a few years ago.

Does that sound right? If it sounds to good to be true … it probably is.

If you think of chasing performance, think what happened to those chasing yields. After years of rising prices, a mini muni (municipal bonds) meltdown has erased over two years worth of gains.

The same is true for longer term Treasury Bonds. On August 26, 2010, the ETF Profit Strategy Newsletter said it's time to get out of all bonds. Since then bonds across the board have been in a funk at best and in a step decline at worst.

Trap #3

But don't trust my word for it. In fact, don't trust much of what you hear and read. Use your own judgment and follow the market's price action.

As long as prices go up, all is fine and dandy but beware that sentiment extremes lead to air-pocket-like declines. That means that prices tumble as if they hit an air pocket, no support seems to halt the carnage. With the VIX close to a three-year low, now is the time to buy cheap put protection if you are hesitant to sell positions.

Alternatively you may watch your holdings like a hawk and pull the trigger as soon as (major) support is broken. There are various support levels, some that simply ding the bullish case, others that really increase the odds of a correction and yet others that are likely to break the bulls spirit and result in even lower prices.

The ETF Profit Strategy Newsletter provides semi-weekly support/resistance levels along with consistent monitoring of the stock market's "vital signs." An ounce of prevention is worth more than a point of cure or it's better to protect than regret.