The Market Is at a Tipping Point - Here's What to Do

RELATED QUOTES

SymbolPriceChange
BAC15.345-0.175
DIS92.36-0.91
AXP63.27-0.58
MSFT56.875-0.555
DIA180.98-1.44

NEW YORK (TheStreet) -- Friends, earthlings and fellow investors, lend me your ears. The official and unofficial sirens of the stock market community are sounding the alarm, and once again it sounds daunting.

In essence, they are saying: "Brace yourself and get ready for some dramatic moves in the major stock market indices."

Thursday's ugly sell-off coupled with a dramatic move higher in the prices of gold and silver may be among the early-warning indicators.

Some of the major gold producers I watch, like Barrick Gold ABX and Goldcorp GG (GG) each moved up over 6% on heavy volume.

Cramer: Spend Your Money on Google, Not Facebook >>

Even some of the small precious metals explorers-producers like Gold Resource GORO and Keegan Resources KGN skyrocketed 8.5% and almost 12% respectively in a single session.

Funny, though, in spite of Moody's downgrade of Spanish Banks and lots of frightening talk about the Europe's ongoing fiscal fiasco, the euro hardly budged.

The CurrencyShares Euro Trust ETF FXE closed virtually unchanged. Spain's El Mundo newspaper reported a near panic by customers at Spain's Bankia. The story claimed nervous depositors had withdrawn more than 1 billion euros ($1.27 billion) over the past week, a report that the Spanish government denied.

One would have expected to see Madrid-based Banco Santander STD under great pressure. Yet although it hit a 52-week low of $5.52 it managed to close at $5.56, down less than 2%.

The news on this side of "The Pond" wasn't all that encouraging either. The Philadelphia Federal Reserve's index of business conditions was released, and wouldn't you know it hit its lowest level since September 2011. If that weren't enough, the weekly claims for jobless benefits showed no improvement, a sign that the pace of hiring remains comatose.

Yet there was some good news. One of the more important companies of the Dow Jones Industrial Average , scandal-ridden Wal-Mart WMT offered a positive surprise.

Dividend Growth Reveals the Path to Profits >>

The Bentonville, Arkansas, based company posted better-than-expected first-quarter results, earning $3.74 billion, or $1.09 per share, in the quarter ended April 30. That compares with $3.39 billion, or 97 cents per share, in the year-ago period. The latest results beat the $1.04 per share analysts were expecting.

Then I watched the opening segment of Jim Cramer's "Mad Money" show. He sounded uneasy and warned that we may see an even uglier sell-off in the market after the Facebook FB IPO and options expiration Friday.

But here's the conundrum. After warning of a possible 1,000 point drop in the Dow, Cramer alluded to the idea that some unexpected good news could suddenly cause the Dow to soar "1,000 points".

If that happened, we may see the S&P 500 leap nearly 8% to a much higher level of around 1,410.

That's why it's a tipping point, or what Cramer called a "fulcrum moment." In other words, the major averages could go either way, and, whichever way they go it will probably be dramatic.

So what's a level-headed trader or investor to do now? First, prune your portfolio of stocks that don't have outstanding earnings, growing revenues and lots of cash.

If you're holding some highly speculative companies like Westport Innovations WPRT , SourceFire FIRE or Cheniere Energy LNG , consider carefully whether they're worth the risk.

Stocks selling at nose-bleed high P/E ratios or that have zero net earnings could be hit the hardest if we experience a steep correction before the next leg higher.

Then take a look at the 30 companies of the Dow Average. These are the some of the biggest and best companies in the world. You might consider buying an in-the-money LEAP option call on the SPDR Dow Jones Industrial Average ETF > DIA .

The CBOE has some useful LEAP option strategies that can help you decide how to employ LEAPs in virtually all kinds of anticipated market conditions. For every LEAP call option you buy, protect yourself from a sudden correction by buying a put option on the SPDR Dow Jones Industrial Average ETF DIA. This offers downside protection (to be safe consider at least a 3 month expiration date).

Another strategic idea is to buy a comfortable amount of shares of the Dow companies that have performed consistently well this year.

This could include American Express AXP , AT&T > T , Bank of America BAC , Disney > DIS , Intel > INTC , Microsoft MSFT and Home Depot > HD .

For every 100 shares you buy, consider buying one put option contract (at or slightly out-of-the money) to keep you from harm's way if the market's initial trajectory is down.

Keep in mind that an unexpected emergency bank bailout program by the ECB or a coordinated effort by the Federal Reserve could give way to a massive rally.

Either way, if you plan for the best, but make provisions for a short-term, breath-taking plunge in the stock market, you'll sleep better and potentially make some money no matter how it all plays out.

Remember, with the preponderance of negative news, a dramatic stock market correction (which may include some panic selling) may be the "final straw" to get the Federal Reserve to pull out all the stops in a carefully orchestrated QE3. If that happens, we'll all be glad to be onboard.

Disclosure: At the time of publication, Marc Courtenay is long ABX, GG, and KGN.

--

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