Trade Alert: You scared, worried or relieved? Why I’m buying some put hedges
Here’s a question for you all: How does the 1% pullback today make you feel? Worried? Happy because you’ve been wanting a pullback and you’re putting money to work? Relieved that there’s finally a pullback? Other?
Personally, I have to admit that I almost feel a sense of relief in seeing the stock market finally have a -1% day. And mind you, 1% sell-offs used to be routine — these days a -1% day means a nearly -300 point move in the DJIA which looks outsized at first glance.
Let’s step back and discuss the stock market set-up for the near-term and the long-term here.
The near-term set up, especially at a market top or a market bottom, is often driven by the emotions of traders (as opposed to the long-term being driven mostly by earnings, interest rate trends, economic policies, geopolitics, long-term investors, etc). For many months now, most traders have been conditioned to buy any dip in the stock market.
The long-term forces of the Bubble Blowing Bull Market that I predicted and positioned us for seven years ago have been further driven by the long-term trend of policies from the Republican Democrat Regime and the Federal Reserve to drive up corporate earnings and to focus on the stock market as a gauge for prosperity. And clearly those near-term and long-term factors have come together to create the recent endless rally with no down days or sell-offs of any magnitude.
Most likely I expect we do get a 10% pullback in the stock markets and that some of the more volatile stocks, including some of our own will get hit for more than 10% in the next few weeks. That said, once again, as I’ve been saying consistently for nearly a decade during this economic expansion and Bubble-Blowing Bull Market, I still think the longer-term forces are likely to continue to drive stocks higher after what might be a more serious pullback in stocks than we’ve seen in a while.
I’m going to nibble a few puts on the IWM (which represents the Russell 2000 smaller cap stock index) and the SPY (which represents the S&P 500), but I’m not turning terribly bearish or calling a top in the stock market. I’m just doing a little more hedging here to my portfolio is which is still quite net long and bullishly positioned.
I’m going to buy IWM puts with strike prices around $155 or so and that expire out in March and April. I’m also going to buy a few SPY puts with strike prices around $180 or so that expire in March and April.
If you don’t trade options or don’t understand options, then don’t worry about doing this trade. The best way to hedge for most retail investors is to simply trim back some of your longs, sell a couple of your losers and slowly build up some cash, as you’ve seen me do over the last year or two.
The market hates coyness, and I’m not being coy, but we might finally get a pullback in the stock market that brings us some new buying opportunities and/or the opportunity to buy a few shares back of the big winners we’ve trimmed over time.
As I often remind you when markets are at all-time highs and in rally mode — remember how you felt the last time the stock market was down 10% and the headlines were full of panic and explanations of why more selloffs were ahead. Realize right now, that if and when the stock market is down 10% next time, you’re going to be a bit scared. You’re going to wonder why you didn’t sell everything at the exact high a few weeks prior.
Be prepared for those emotions now. Whether this is the start of that “next time” the stock market sells off or not, you want to be prepare for it now.
Don’t be greedy. Be cool. There are Revolutions happening all around us that are creating new trillion dollar markets and over time, I plan to keep putting our buckets out there to catch some of those dollars streaming into those new Revolutionary markets.
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