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Daily State of the Markets Good Morning. Although our models told us to hop back on the long side of the market six weeks ago, there are a great many investors out there – individuals and professionals alike – that have missed the current rally. For example, I personally know three investors who make their living in the market that have been either short or entirely in cash during the current joyride to the upside. In light of the fact that I live in a glass house so to speak, I am most definitely not going to be tossing any stones aroung this morning. No, my first point is that this rally was an easy one to miss as the volatility in the market prior to the start of the rally had been insane and the macro backdrop was nothing short of ugly. Thus, there were plenty of reasons to avoid stocks at the end of last year. So, now that the market has enjoyed a pretty decent run, what is the underinvested investor to do? With nary a down day to speak of this year (as we mentioned yesterday, the biggest daily decline for the S&P 500 in 2012 has been -0.57%), should one simply throw up their hands and bomb in? Should investors exhibit patience and continue to wait for a 3-5% pullback? Or is this the time to play contrarian and start betting against the bulls with big short positions? There is nothing quite like a confounding rally to cause people consternation and confusion. My bearish buddies simply can’t see ANY way that stocks can advance from here. And to give you an example of the confusion/frustration level that is out there amongst those on the sidelines right now, I even had one person ask me yesterday if it was time to go back to a buy-and-hope approach. (To which I politely replied, “Uh, no.”) And while I am fully aware that I’ve been beating this drum a fair amount lately, this is the type of rally that reinforces the idea of utilizing a system for entry and exit points instead of a crystal ball. Please don’t mistake my message this morning. I am not saying that investors should initiate or even add to positions at this point in time. Heck, my “new money rating” has been “hold” for some time now. Stocks are overbought and sentiment is starting to get a little too optimistic, which tells me that a pullback could begin at any time and for any reason. As such, instead of doing something a silly as returning to the buy-and-hold approach, I think it might be smarter to implement a buy-and-HEDGE approach at times like these. Let’s say that the relentless march higher is tearing you up inside and you’ve decided that you simply MUST get some money in the game. In short, you can’t take it anymore. So, here’s the plan… Instead of simply buying after a strong rally and hoping that the rally continues unabated from here, it might be smarter to establish a plan to “buy and hedge.” More specifically, the idea is to buy a portion of your positions now and then establish a strategy to hedge those positions if the market itself goes against you. This is an especially effective approach if you are trying to get into several individual stock positions. So, let’s say you want to pick up some Apple, some Google, and some IBM in the tech arena as well as some Freeport to get your metals fix, and then maybe some consumer names such as Mickey D’s, Monster, and Chipotle. Okay, that’s easy enough. Now for “hedging” part of your strategy, you’ve got a couple of choices. First, you could write some call options on your positions in order to bring in some income and give your long positions a little downside cushion. However, this approach does limit your upside should the bulls continue to run, and it is important to note that such a strategy can can get more than a little complicated. The other approach to take is to use “trigger points” to initiate downside hedges in your portfolio. Here’s the plan. First, identify a level in the market that could be a problem on a chart basis such as 1300 and 1280 on the S&P 500. The idea is to use these “trigger points” as signals to put some hedges on your long equity positions via inverse ETF’s. So, if the market starts to struggle after your buys (this usually happens within minutes of your final buy), you needn’t beat your head against the wall because you’ve got a plan. If the S&P breaks below 1300, you simply add something like a 10% position in the SSO. This effectively covers 20% of your long exposure as the SSO will increase when the market declines. And then if the S&P breaks down below 1280, rinse and repeat. Boom, you’ve got 40% of your longs covered. And then as long as you remain happy with the way the longs are acting you can continue to hold your favorite stocks through a normal pullback. Yes, I know this is a simplistic approach (I personally will be using my market models as my “triggers” to hedge stock positions). But given what has transpired in the market lately, it just might be time to buy and hedge – just in case the trees don’t grow directly to the sky this time. Turning to this morning… A strong rally in China and expectations for a deal in Greece has pushed foreign markets higher. U.S. futures are also slightly in the green this morning before the bell. On the Economic front… There are no reports scheduled for release before the bell today. Thought for the day… Why not do something nice for someone today for no reason at all… Pre-Game Indicators Here are the Pre-Market indicators we review each morning before the opening bell… !========>
Positions in stocks mentioned: None For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com !========> The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment. Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided. The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed. The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer. Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice. Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results. !========> |
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