Zacks’ Voice of the People Highlights user OnIslandTrader: “Finally Some Follow Through” from the People & Picks community.

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Finally Some Follow Through

After a couple months of complacency we are finally seeing follow through to the downside. The end of April gave us a small but precarious head-and-shoulders formation capped off with an ugly bearish engulfing candle. May started out on an unexpectedly strong note, but today the action is downright ugly as the markets break below short-term support levels and a number of stocks hit fresh 52-week lows. Volatility is back, as witnessed by the VIX up more than 60% in just the past two weeks, and that volatility will wreak havoc on your portfolio and your nerves if the selling doesn’t get to them first.

New lows call for hedging. Volatility calls for hedging. It’s that time again.

You might be thinking, “We’ve hedged a couple times throughout this rally and all the hedges have done is lose us money. Why is this time any different?” Honestly is might very well turn out to be a repeat of the shallow selloffs we’ve seen over the past year and once again we’re out a few percentage points.

Passing up on gains sucks, but hedging is a form of insurance. It’s a willingness to spend money to protect against unexpectedly large downturns so you can protect the bulk of your capital and live to trade another day. The European debt issues have the ability to spiral out of control and take the rest of the markets down with them. As investors slowly come to recognize and respect the trouble Europe is in, they have become skittish and lost conviction in their bullish arguments in favor of the market.

There are times to be aggressive in the markets and times to be defensive. Today we find ourselves in the latter after one hell of a rally. Tighten up those stops again and get your hedge in place. When the coast is clear we’ll focus on making money again but for now it’s defense, defense, defense! Our hedging vehicle of choice is the ProShares Ultra Short Russell 2K ETF (SKK).

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