Troubling market internals warrant buying some portfolio protection â Here’s how
As equity markets print new all-time highs and the CBOE Volatility Index prints 52-week lows, this should be considered as a bullish outlook by all accounts. However, if we look under the hood, the internals during this rally concern me and in my opinion, warrants buying some protection on these all-time highs. If we look at the Sector Rotation RRG Chart, we see that over the past five weeks, the rally in the S & P 500 has been led by utilities, energy and staples. While technology has started to show a small increase in strength this week, the overall tone of the market is clearly in defense. With materials and industrials also rolling over, we simply lack the confidence to call a strong bull market on the recent all-time highs. Now if we look at a chart of the S & P 500, we see that the new all-time highs were not confirmed with a new high on the relative strength index momentum indicator, suggesting buyers are exhausted and may lack the strength to continue higher. Additionally, volume has been increasing on down weeks and decreasing on up weeks, further evidence that this bull market lacks strength. The trade I see two possible ways this can play out: Either the offensive sectors such as technology, discretionary, materials and industrials can start leading again, or we could potentially see the S & P 500 itself start to roll over. With the VIX trading around the 12 handle, my view is that it costs us very little to buy some protection and it would allow you to remain fully invested in the markets. This would allow further upside participation if the offensive sectors came back to life while giving up a small percentage of your portfolio for the hedge. And this would provide downside protection if the markets were to roll over. I’m going out to July and buying the $530 puts on the SPDR S & P 500 ETF Trust (SPY) for $7.35, which is only 1.3% of the SPY’s value to buy over 2 months of protection. I’m choosing a strike price that has a delta of 40, which translates to $0.40 of profits for every $1 that SPY drops by. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
