Hedging Strategies May Now Come Into Play
As of Noon EDT: After reviewing the big picture, we are inclined to be patient and not chase the market from these levels. We will post some charts and additional comments later today. Odds are very high we will choose the “do nothing” alternative. We want to see how this market handles the next form of bad news. If anything, between current levels and 1,260, we can envision traders beginning to sell. Keep in mind, we stated on August 12 that a rally back toward 1,260 was well within historical norms.
This morning’s ADP Employment Report showed 91,000 new jobs created in August, which is good relative to the market’s extremely low expectations. The majority of markets closed above their 20-day moving averages yesterday, which is the first sign the short-term risk-reward outlook is improving. Another positive development, especially if it can hold, is a handful of markets, including the S&P 500 Index, have 200-day moving averages that are either flat or turning up again. If you look at the math on calculating the 200-day for the S&P 500 Index, you see that as long as the S&P 500 can stay near or above 1,200, the 200-day would remain flat or turn up a little over the next few weeks.
If the S&P 500 can hold above 1,200, we are open to adding some risk back into our portfolios. If the markets were to become weak again, we would most likely offset the risk-oriented positions by hedging with an inverse position – which is a form of fence-sitting in the short-run. If the market moves higher in a convincing manner, you remove your hedges and consider adding more risk. If the market drops rapidly again, you remove your risk-based/long positions and keep your hedges, which can make money as markets fall. The “do nothing” alternative is also an option.
We have seen enough to at least consider implementing a long followed by a short/inverse (if necessary) strategy. Step one would be to add some risk. Step two is to decide if you want or need to hedge that risk in the coming days and weeks. Step three (if applicable) would be to decide to keep the bullish positions or the keep the bearish positions. This basic strategy is discussed in the video we posted on August 29. Please see these comments from last night for more information. It should be noted that any long/short strategy should be considered only by very experienced market participants.
These ETFs have 200-day moving averages that have ticked back up:
DBA, RJA, PGX, TIP, XOP, IYR, XLB, IBB, XLE, FCG, MDY
These ETFs have 200-day moving averages that have flattened out:
DVY, EWC, VNQ, IEZ, EWA, OIH, SPY, VTI, RSP, IWD
