For the Record

Yet millions of people are interested. Business network CNBC has been breathlessly counting down the Dow's progress toward a record, and has often been criticized for treating the markets like sporting events. My reaction to that is: So what? Why not have a little fun? I was musing on this the other day as the Dow flirted with a record, wondering why I, too, was rather enjoying the CNBC-induced fixation on the Dow.

I strongly believe that you should enjoy investing. I realized early in my career that people who like (or even love) what they do have a huge competitive advantage. They work harder because it doesn't feel like work. They retain information because they find it interesting. They're better at what they do. To enjoy investing doesn't mean you have to work at it obsessively. Indeed, this column is written expressly for people who have other careers and interests. If you start finding it tedious or oppressive, it's time to shift gears. One reason I enjoy managing my portfolio is that I don't do it full time.

So why not celebrate when the Dow closes at a new all-time high? I intend to. And while I'm at it, I plan to make some money. Here's how.

Let's step back a moment and see how we've gotten so close to record territory. I've read repeatedly that the recent rally in the equities markets has taken many people, even professionals, by surprise. That's because the weak real-estate market is supposed to be dragging down the broad economy and sinking consumer confidence. I have two words for those puzzled by the rally: oil and rates. Several weeks ago oil prices plunged to near $60 a barrel and long-term interest rates retreated. Both act as a stimulus. I wrote some time ago that it's not too early to begin thinking past the slowdown now underway to the recovery that lies ahead. Stock prices anticipate events.

That said, the recent rally hasn't been all that broad based or impressive. At around 2250, the Nasdaq is still well off the high of 2371 it reached on April 19. It bottomed on July 21 at 2020, which means my next selling target won't come until it hits 2500 (25% above its most recent low). The S&P 500 is just slightly above the level it reached in May. Only the Dow is anywhere near an all-time record.

As I said at the outset, it's irrational to attach any great significance to the Dow's possible record. But let's face it: People are sometimes irrational, which drives economists crazy. I think a new record does have a real psychological effect. For one thing, the hyped-up news coverage puts people who otherwise aren't paying attention in a mood to buy stocks...which is why I'm planning to sell something.

Many professionals have been pursuing the same idea, which is one reason stocks have sold off every time the Dow nudges above its record level, as it did again this week. Traders I've spoken to have sold into the media attention and then bought on the dips. They don't want to see the Dow creeping ever closer to a record, but are looking for a break-out rally in which the Dow surges convincingly above its record close. I'm not a trader, so I'll settle for a new record, however it arrives, and the accompanying warm glow of a rising market.

We're not close to one of my selling thresholds, so strictly speaking this is a departure from the disciplined buy-and-sell strategy I've often discussed in this column. I'm not planning to actually sell stocks. Rather, I'll sell some out-of-the-money calls on stocks I already own — covered calls — locking in further gains if the market keeps rallying while raising some cash now. This means looking for stocks whose options are boasting a fat premium, or have gotten ahead of themselves.

To identify these candidates, I ran the screen I described in the June issue of SmartMoney, looking for stocks with high price-to-growth ratios that have already had big rallies. (That approach worked very well in this summer's selloff.) Three stocks in my portfolio emerged as potentially overvalued: Ciena (CIEND), Network Appliance (NTAP) and BMC Software (BMC). Their options also turn out to carry large premiums, a function of the stocks' high volatility. Some other well-known names also surfaced: Qwest Communications International (Q), Merck (MRK), Celgene (CELG), Starbucks (SBUX) and Adobe Systems (ADBE). The biggest category was real-estate investment trusts, which I've warned before appear to be overvalued.

If you want to stay fully invested, you can plow the proceeds into something that looks undervalued. Or keep some cash for the next pullback. Then, when the Dow finally breaks through, you'll have something more tangible to celebrate than a psychological milestone.