Retail Investors: How to Protect Against the Sell-Off Strategists Predict

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Wall Street is getting increasingly bearish on stocks, and one top equity strategist has just thrown up the white flag.

Retail investors don't have to be at the mercy of the big institutional investors who could dump their shares on the market at a moment's notice.

"Traders who are concerned about a potential recession should first look at the level of risk they have with their portfolio and if they're comfortable with it," said Rick Swope, vp of investor education at E*Trade.

Before we get into the nitty-gritty of retail investing strategies, let's go over the facts.

The Facts

Stifel's Head of Institutional Equities Strategy Barry Bannister published a note Wednesday evening saying a 32% S&P 500 selloff will come in December of this year, preceding a recession starting in May 2020.

That's because the yield curve has remained inverted since June 20, with the 10-year treasury yielding 1.5%, less than the 3 month treasury's 1.99%. The duration of this yield-curve inversion indicates a recession is no more than two years away. Bannister says -- clearly -- a recession is less than a year away.

When investors flood into longer-dated bonds, they're seeking to keep their invested capital safe, sacrificing the potential return in riskier assets like stocks. They think a recession is coming and that economic growth and inflation will be low enough that taking the risk of being in stocks isn't with the return that could be meager, or even negative.

This demand for 10-year treasuries pushes the bond's price higher and the yield lower. Price and yield move inversely.

The S&P 500 is up 16.5% year-to-date, with the forward one-year price-to-earnings multiple at 16.7, which is fairly valued at best, many on Wall Street say.

Bannister isn't alone in his increased bearishness.

UBS Wealth Management moved its equities position to underweight earlier this week. LPL Financial reduced its S&P 500 earnings per share estimate to $165 from $170 -- still bullish compared to Wall Street's consensus $162.

Investors are looking for the Federal Reserve to cut interest rates two more times in 2019, as the tariff war between the U.S. and China not only threatens to dent U.S. domestic demand, but may already have done so. Business confidence has plummeted while corporate executives are reducing investments, as potentially added tariffs on both sides could be in the cards. Two rate cuts, while providing a support level for stock prices, would unlikely outweigh the negative impact of the trade war, many on Wall Street say.

What Retail Investors Can Do

If stocks sell off, there's nothing retail investors can do to stop it. But they can protect what they have against it.

Retail investors can make sell-stop orders, Swope suggested. That's when an investor sets his or her trading platform to sell stocks at a specified price. This reduces the risk of selling too late. Of course, the risk with this is missing out on further stock gains.

There are also put options. A put is a contract that allows an investor to sell a stock at a specified price, the strike price, in usually a six month time period before the option expires. An investor would want a strike price above the price he or she paid for the stock, so if the stock price falls, it can be sold at the higher price. But owning puts means premiums, and if everyone starts buying puts amidst bearish sentiment, those premiums will skyrocket. 

You don't want to be stuck paying high premiums if the market doesn't tank.