Batten Down the Hatches

	Elliott Gue PF Newsletter.com
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The market faces a lot of event risk over the next few weeks. The November presidential election, a series of political debates and third quarter earnings season all have the potential to cause some pretty wild swings for the major averages.

In such a volatile environment, it's absolutely imperative you follow our advice on stops published in the portfolio table each issue. We use stops in the Advantage portfolio both to lock in gains on profitable ideas and to protect our downside when we're wrong.

Our strategy is to use what's known as a trailing stop on open trades to lock in gains. This means that as a stock moves in our favor, we'll continue to move (trail) the stop higher (or lower for shorts) to lock in incremental profits. In this way, we stay with a trend for as long as possible.

It's always a good idea to have a target in mind for any position you take, but the truth is that strongly trending stocks have a habit of moving further than most investors expect. Rather than picking some arbitrary exit point, we prefer to allow the market to take us out of a position via a trailing stop.

Remember that the potential reward is only half the trading equation. It's always a good idea to know your risk limitations. That's why we recommend setting a stop on every open position.

Normally, in this portfolio we recommend placing a stop between 8 and 12 percent from the recommended price. This keeps our losses to a minimum.

In this issue, tighten up your stops in General Motors (GM) and Compahnia Vale do Rio Doce. Also, note we were stopped out of our recommended Merrill Lynch short in early September for an approximate 8 percent loss. Stand aside for now.

GM continues to struggle. The company is considering an additional $500 to $1,000 in vehicle incentives this autumn in addition to those announced during the summer. This certainly looks like a desperate bid to sell some cars no matter what the cost to profitability.

But GM can't win longer term by selling cars at a loss. Toyota, among others, continues to slowly but surely erode market share. GM remains a short above 42.50. We're lowering our recommended stop to 45.75 to limit our risk.

Compahnia Vale do Rio Doce continues to fire on all cylinders. Commodity stocks have started to make a comeback after a nasty dip last spring. The main catalyst here seems to be a pick-up in demand for basic commodities from China.

We're also happy to see that management has remained very conservative on new acquisitions. It's a well-known fact that Rio wants to diversify outside Brazil and into other metals besides its traditional iron ore business.

The diversification is a good idea--diversified miners tend to fair better long term because they're not overly leveraged to a single metals market. The risk: In a desperate attempt to gain scale, Rio could pay too much to buy a competitor.

The company recently bid for Peruvian copper miner Las Bambas but failed in its bid. Instead of raising its offer price, Rio stood aside. This is very encouraging--the company is maintaining capital discipline.

We're still positive on the stock, but we're also conscious of the fact we've got a large gain (about 25 percent) to protect. When you factor in the company's considerable dividend payout, that gain is even more impressive. We're raising our stop to 18.89 to lock in a near 19 percent gain.

Finally, we're encouraged by Textron's performance. The company's defense unit looks likely to be the lead contractor on a $99 million contract to sell armored vehicles to Israel.

Better yet, the stock has been strong even when the market was selling off hard. This is often a sign of institutional accumulation. Textron remains a buy under 65 with a stop at 59.15.

Elliott Gue will be available to take your questions until Monday, October 18. Please use the form below to submit your questions.