We got our sell-off, now what?
Despite generally failing our levels yesterday (see Fibozachi review), the Dow held 10,250 and the SOX were green so we wrangled ourselves back to neutral into the close. Over and over again my best advice to bears in this rally has been to take profits off the table quickly as we rarely string more than 2 days in a row together of downward movement. With that in mind, we moved to lock in our bearish profits ahead of the 3pm stick save which, though disappointing yesterday, at least was predictable as ever.
We even went long on oil futures at $72.50 (after a failed attempt to go long at $73) and we came just short of our goal of $74 this morning at $73.88, which is close enough to take the money and run in the futures (pays $10 per penny per contract). So we’re looking for a small retrace today (up about 0.5%) to retest our levels and then we’ll see how we’re going to play into the afternoon depending on what holds up.
Meanwhile, I think it’s time to revisit the concept of hedging for disaster, something I advocated during another “recovery,” in October of last year, where we made our cover plays to carry us through a worrisome holiday season and into Q1 earnings – “just in case.” The idea of disaster hedges high return ETFs that will give you 3-5x returns in a major downturn. That way, 10% allocated of your portfolio to protection can turn into 30-50% on a dip, giving you some much-needed cash right when there is a buying opportunity.
At the time, I advocated SKF Jan $100s at $19. SKF hit $300 around Thanksgiving and those calls made a profit of over $280 (1,400%), so putting just 5% of your portfolio into that financial hedge would give you back 90% of your portfolio when you cash out. Keep in mind these are INSURANCE plays – you expect to LOSE, not win but if you need to ride out a lot of bullish positions through an uncertain period, this is a pretty good way to go.
Another play we picked at the time was DXD Apr $55s at $14.20. DXD doubled that same month, went back down to $50 and was back at $90 in March. The nice thing about playing options rather than the stock is the Apr $55s were $65, up 350%…
