The roll call of bullish investors continues to get longer. However, sentiment indicators such as the weekly Investor’s Intelligence report, the VIX and others have been suggesting that it’s time to take profits and buy protection for your portfolios.
And now that the E.F. Hutton (when it talks, people listen) of sentiment indicators is forecasting lower prices, you might be neglecting your portfolio if you don’t listen and react with market hedges.
The CBOE Equity Put/Call Ratio is one of the oldest sentiment indicators around. Used since the early 1990s, the indicator monitors equity option volume traded at the CBOE to determine whether the crowd is getting long or short the market. Low ratios tell us that traders are favoring calls — a sign that the crowd is bullish. High ratios indicate that more puts are being traded — a sign of a bearish crowd.
Historically, you will beat the market at its game when you sell when everyone is bullish and buy when the crowd is bearish. It really is that simple.
Based on the activity in the put/call ratio, everyone was bullish at the end of February as the ratio hit a relative low. Now the trend is moving higher again, suggesting we should continue to see selling for another few weeks — and that coincides well with next week’s FOMC meeting.
Translation: It’s time to make portfolio hedges in preparation for lower prices.
2 Market Hedges
ProShares Short S&P500 (ETF) (NYSEARCA:SH): A subtle way to hedge against lower prices is to use the ProShares Short S&P500 (ETF). SH is negatively correlated with the S&P 500, meaning that SH should go up 1% for every 1% drop in the index.
We typically use SH as an overweight alpha position, somewhere around 10% to 15% of a portfolio, to offset a decline in the market. Sell SH above $22.75 for 5% gains, which can then be allocated to your long positions.
iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX): Buy the VIX! The CBOE Volatility Index is well-known for the way it spikes during market selloffs. Typically, hedging with the VIX is left to the pros, but anyone can do it easily with the VXX. This exchange-traded note uses short-term futures to mimic the VIX, meaning VXX moves higher as market volatility goes on the rise. Buy VXX now with a target of $32.50.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
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