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RoboStreet – May 3, 2018
Building a Hedge of Portfolio Protection
There is no shortage of hand-wringing in the current market landscape, especially with the S&P 500 retesting its closely-followed 200-day moving average that was briefly violated in yesterday’s volatile session. Volatility is running high and for good reason, stocks are struggling to rally in the midst of the most robust earnings season since 2008. The bearish camp has embraced the “it’s as good as it gets” mantra from the Caterpillar earnings call that noted the first quarter would be the ‘high water mark’ for profit margins. That one-liner has had more influence on investor sentiment than any data point or earnings surprise that has crossed the tape.
Not even Apple’s upside surprise reported Tuesday could fortify a very nervous atmosphere of sorting out whether the market has seen its best days. To the bull’s credit, all five FAANG stocks posted strong Q1 results. Facebook, Amazon.com, Apple, Netflix and Alphabet (Google) all beat on the top and bottom lines, but all of which have been met with very modest enthusiasm with the exception of Amazon, soaring to a new all-time high on simply fantastic numbers.
But with that said, the pronounced weakness in several favorite sectors, namely semiconductors, aerospace/defense and financials have all given back all their gains for the year and then some. There’s a growing feeling that there are few places to hide with the exception of a select number of coveted names like Amazon, MasterCard and Microsoft- all of which are or have been RoboInvestor Portfolio core holdings.
And then there is the geopolitical and domestic political landscape. There is the upcoming summit with North Korea, the likely undoing of the Iran nuclear deal, the reworking of NAFTA, the pending tariffs with China and Europe, the ongoing involvement with Syria, and the visceral drama taking place in Washington D.C. that all have to be taken into account. And while some of these hot spots and saber rattling may seem to invoke exogenous risk, most will likely be diffused in good time, but it does provide a basket of excuses to ‘sell first and ask questions later’.
Entering the summer months is seasonally a weak time for stocks, as if we needed yet another reason to be concerned. When we also look at the market from a purely technical standpoint, the S&P 500 is running the risk of a material breakdown if its 200-day moving average suffers a protracted breach. Because program trading dominates over 70% of all daily trading on the NYSE and Nasdaq, any high-volume penetration of 2,600 to the downside for the S&P will invite a 100-200 point sell off for that benchmark index. And it could happen very quickly because of how these computer-generated sell programs feed on themselves.
To this point, investors should have a defensive strategy to deploy when the caution flag is being waved, and from my viewpoint, it is. I have put together a three-pronged strategy to protect investor portfolios from any potential market calamity and I will be sharing my strategy with RoboInvestor subscribers on Sunday, May 13, so they have an action plan heading into the second half of May. Just because we are in the month of May doesn’t mean we have to “sell and go away.” But the last thing you want to see on CNBC or Bloomberg is a trading floor full of panicked brokers yelling “May Day! May Day!” because the market drops through the S&P’s 200-day moving average like a hot knife through butter.
From my proprietary Tradespoon Seasonal Chart, we can see the SPDR S&P 500 ETF (SPY) sitting right on key support at 260.4. This is not a level in the market investors should toy with. Yesterday, shares of SPY traded down to 259.05 before buyers came in to rescue the market. Any major crack at this level over a two-to-three-day period will invite a swift move lower that will cause great technical and psychological damage.
For many investors, a going-to-cash exit strategy can create a nightmare of a tax situation. Instead, I provide a formidable hedging strategy to protect portfolios of all sizes that is certain to mitigate downside risk in the event of a trap door sell off where stocks drop like they are going over a waterfall. I don’t intend to have my portfolio exposed to that kind of potential danger and neither should anyone reading this column. We all know the old saying, “if you fail to plan, plan to fail.” And nothing could be truer than when it applies to our money in a frothy market.
Do not delay on this action plan. Have the tools necessary and ready to put to work so and protect your portfolio’s principle in the event the market tremors being felt today materialize into the market earthquakes of tomorrow. Seeing how headline risk has played havoc with the major averages on so many trading days these past couple of months, I find it incredibly naïve of investors to not have a plan for portfolio insurance in place. To that end, Click Here to go to RoboInvestor and get the details of how to put a floor under your portfolio. After all, it could be your best trade of the year.
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