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Doug Kass: 4 Essentials for Correction Protection

It appears that the market’s unstoppable march higher since late summer may have in fact have stopped.

The Fast Money traders have long said an exogenous event would take the market down and it appears violence in Libya may be just that.

On Wednesday, the S&P closed lower for a second consecutive day with chatter suggesting that sellers will dominate in the days ahead.

Doug Kass, president of Seabreeze and a CNBC Contributor is among the camp of investors who are cautious.

According to Kass, ”The market’s character is changing.” He says the smooth ride that we’ve had since late summer is in jeopardy.

In a live interview on CNBC’s Fast Money he again tells the desk what he first said in late December 2010. “I think we’re going to end 2011 right where we started it.”

”I think we’re in a sideways market reminiscent of 1953, 1960 or 1994. It’s a very unusual event but the market will probably end the year up or down only 1 or 2%."

How do you navigate a market that’s no longer a one way market – one that’s more volatile and less hospitable?

Kass tells us to employ four core principals:

  • Diversify
    Diversify along industry and sector lines, Kass says. Don't have more than 15% in any one S&P sector; nor more than 10% in any individual industry, nor more than 5% in one company.

  • Maintain Above Average Cash Positions
    In an extended market that’s doubled in a couple of years be more cautious and less concerned with return on capital than return of capital, Kass says.

  • Buy Protection
    Options are still very cheap, Kass adds. If you’re short buy out of the money calls and if you’re long buy out of the money puts as hedges.

  • Avoid Momentum Stocks
    Investing in momentum is profitable in a bull market but this is a two way market now. Avoid momentum plays like the plague, he says, both long and short.

Don't take these suggestions as code for run for the hills; Kass isn't saying that at all In fact he thinks there will be lots of opportunity to profit but you'll have to be nimble. "It will be a great year for fast money traders but a bad year for the buy and hold crowd."

What do you think? We want to know!

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And if you're looking for trades we’ve got ‘em. When asked how to put money to work Kass told us, “I like consumer non-durables a lot. They’ve been unloved. Companies like Clorox , Colgate and P&G are all names I’m long.”

We know what you're thinking? Doug Kass is a bear. He's been predicting the demise of this rally for months. But when Kass speaks we listen. He correctly called a bottom last summerand also predicted the crisis lows in March 2009.




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Trader disclosure: On Feb 23, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Seymour owns (AAPL); Seymour owns (BAC); Seymour owns (F); Seymour owns (FXI); Seymour owns (INTC); Seymour owns (STP); Seymour owns (TSL); Kinahan owns (BAC); Kinahan owns (C), is short (C) calls; Kinahan owns (CSCO); Kinahan owns (F); Kinahan owns (GE); Kinahan owns (MSFT) puts; Kinahan owns (NFLX) puts; Kinahan owns (WFC); Kinahan owns (YHOO); Finerman's Firm Is Short (IWM); Finerman's Firm Is Short (SPY); Finerman's Firm Is Short (MDY); Finerman's firm is short (XRT); Finerman's firm is short (IJR); Finerman's Firm Is Long S&P Puts; Finerman's Firm Is Long Russell 2000 Puts; Finerman's Firm And Finerman Own (AAPL); Finerman's Firm Owns (BAC) Leap, Finerman Owns (BAC); Finerman's Firm Owns (BBY); Finerman's Firm And Finerman Own (BP); Finerman's firm owns (FCX) puts; Finerman Owns (GOOG); Finerman's Firm And Finerman Own (HPQ); Finerman's Firm Owns (IBM); Finerman's Firm Owns (JPM), (JPM) Leap; Finerman Owns (JPM); Finerman's Firm Owns (M); Finerman's Firm And Finerman Own (MSFT)’ Finerman's Firm Owns (WMT); Jon Najarian owns (CHK), is short (CHK) calls; Jon Najarian owns (DTV), is short (DTV) calls; Jon Najarian owns (BP), is short (BP) calls;’ Jon Najarian owns (NBR), is short (NBR) calls; Jon Najarian owns (KWK), is short (KWK) calls; Jon Najarian owns (HPQ); Jon Najarian owns (MOS), is short (MOS) calls; Jon Najarian owns (ATML), is short (ATML) calls; Jon Najarian owns (LLTC), is short (LLTC) calls

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