There is a saying in the insurance business that claims that no one likes to pay for insurance until an accident happens.
Well, the same is often said about investors protecting their portfolios for declines in the market.
With the S&P 500 starting to seriously flirt with the 2000 level, as well as other indices showing signs of tiring at their new all-time highs, now might be the time to consider protecting your portfolios.
The S&P 500 is almost exactly 50 points higher from where the market was when we wrote about three hedge positions that make sense to protect your portfolio, or profit from a pending decline in stocks. The continued low-volatility rally in stocks appears to have swung some bears to the bullish camp lately, but their late-game shift is more likely to hurt rather than help as they likely represent the last push higher for stocks.
Traders would be even wiser to prepare for some selling pressure now as the S&P 500 is highly likely to see some selling pressure over the next month.
Well, you can point to the record-high numbers and just call “overdue,” but we prefer to stick to the data.
Here are three big worries that have hit our radar:
Multiple Overbought Readings
The latest rally in stocks has pushed many key indices and sectors into technically overbought readings. For example, the S&P 500 Index hit an overbought reading on Monday as its RSI crested above the 70 mark.
The last time that we saw a similar overbought reading was late 2013, setting the market up for a short-term 5% correction.
Extremely Low Volatility Readings
The low readings of the CBOE Volatility Index serve as one warning from the sentiment front. Recent readings of the VIX have hit multiyear lows in crossing below the 11 level earlier this week. The low VIX readings suggest that the market is “Whistling by the Graveyard.”
Overly Optimistic Sentiment
Last week’s Investor’s Intelligence Poll reflected some lofty optimism toward the market. The report showed that the percentage of bulls hit 62%, the highest since Jan. 3, 2014. Historically, the market sees 3.2% declines over the following four weeks when the bull camp grows to 60% or higher.
Remember, the best time to be bearish is when everyone else is bullish.
With the market continuing to near its all-time highs, the positions we recommended in the original “3 Ways to Hedge Against the Coming Correction” are still valuable options.
A market correction is likelier than not. Better safe than sorry.