3 Easy Ways to Bring Balance to a Bullish Portfolio

stocks to buy - 3 Easy Ways to Bring Balance to a Bullish Portfolio

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The indices made new highs last week. We even saw strength from the tech sector, which has been lagging for a while. Now the bulls are on a run and the bears are on their heels. For practical reasons, this is a bullish market because the only variable is sentiment. Although it sours occasionally, it doesn’t change the facts and they are currently bullish. But to guard against bad sentiment actions, it’s good to find stocks to buy to balance a bullish portfolio.

A few weeks ago, equities sold off even after the Federal Reserve gave us bullish facts. They committed for two more years loose monetary policy. Yet investors chose to be nervous and sell stocks. That was an opportunity to get long and now is the time to pause. No, I’m not calling for a correction, but there is reason to question the next waves.

We’re approaching a seasonal time that usually sees selling occur. They even have a cute meme for it: sell and May go away. Smart money might want to get ahead of the masses and act early. Being cautious is not the same as shorting markets. In fact, it would be very dangerous to do so now. The threat of big upside breakout from the Nasdaq is real (more on this later).

Today’s point is to stay cautiously optimistic. We hear this term often, but they don’t specify trades to match it. The first step of being cautious is to actually book profits in winning trades. This doesn’t necessarily mean leaving all bullish potential, but at least some.

There are many means for protecting a portfolio. Today, we will address three that are simple enough for most traders. I find it easiest to hedge a bullish portfolio by using options. The three setups for today are:

  • iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT)
  • SPDR S&P 500 ETF Trust (NYSEARCA:SPY)
  • Invesco QQQ Trust (NASDAQ:QQQ)

Stocks to Buy: iShares 20+ Year Treasury Bond ETF (TLT)

Stocks to Buy: iShares 20+ Year Treasury Bond ETF (TLT) Stock Chart Showing Potential Bottom
Source: Charts by TradingView

The U.S. bond market is now a rare major global fixed-income source. Consequently, big investors seek it for yield reward by default. Buying bonds in major markets outside of the U.S. nowadays will cost you money. They call it negative yields, which is insane. This, by definition, is the opposite of capitalism.

When we buy bonds, we are essentially lending the governments money. When they offer us negative rates, they are essentially asking for gas money to come pick it up. This created the acronym TINA, which stands for there is no alternative. Anyone around the world seeking fixed income from governments have to buy the U.S. bonds.

This should put a bid under bond prices, but it hasn’t. The TLT represents the 20-year Treasury bond ETF. It has been a falling knife for months. First, it spiked to $180 per share over a year ago, then it fell more than 25%. It surprisingly sliced through a few important levels of support.

However, it is approaching potential turning points. This means that it could have a fairly long rebound stent. But those who tried this recently suffered disappointment. Therefore, it is extremely important to have a tight stop on this trade. If the TLT stock falls below $135 I would get out. It’s not the official bearish trigger, but I don’t want to find out what’s really below it.

Technically, the TLT could find sellers if it loses $133.20 but I would not wait this long. Conversely, the buying will accelerate if the bulls can breakout from $138.20 then $139. Buying shares would be a way to trade this. But since I would use a tight stop, I favor buying May TLT at-the-money calls for this.

SPDR S&P 500 ETF Trust (SPY)

Stocks to Buy: SPDR S&P 500 ETF Trust (SPY) Stock Chart Showing Extended Range
Source: Charts by TradingView

Investors who have nothing but bullish bets in their portfolio are at risk. It is best to create balance by having a few bearish trades. This doesn’t always mean shorting stocks, in fact, I almost never do it. But the options markets make it very easy to deploy a few bear bucks using the indices. The idea is to create a source of greens to help on bad days.

Balance is not the same as protecting 100% of my risk. Doing that all the time is not practical and is very expensive. But since markets are at record levels, there is no better time to do this. There are dozens of indices and ETFs from which to choose. Investors need to find what mirrors their positions.

The general one I prefer is the SPY. It captures the majority of the mega-cap stocks and their sympathizers. To be bearish the SPY, I can buy a simple vertical put option spread. These are also called debit put spread. The cost to open the trade is the maximum I could lose. If the stock falls through my position then I would benefit to the maximum gains.

Remember these are not profits so to speak, because they are offsetting losses elsewhere in the portfolio. And that is the balance we seek. At this time, I would use the SPY May contract in a $10 wide spread at $408. This would cost under $3 therefore providing me with $7 of balance on market hiccups. The beauty is that I can change my mind at any time. I can sell it back out for partial gain or loss.

Invesco QQQ Trust (QQQ)

Charts by TradingView Stocks to Buy:Invesco QQQ Trust (QQQ) Stock Chart Showing Potential Pop Setup
Source: Charts by TradingView

If my portfolio has a ton of tech stocks, then I should use the Invesco QQQ Trust (NASDAQ:QQQ). Doing this would target the FANG gang, Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL). These are leader stocks that move hundreds of others in sympathy.

This morning Alibaba (NYSE:BABA) is rallying on news. They have agreed to records fines from China but they can put the matter to rest. This could pour more fuel on the Nasdaq fire so shorting it is really risky. Again, here it is important to remember that it is balance we seek, not bearish trades.

Similarly to the SPY idea, the goal is to buy a simple debit put spread in QQQ stock. Buying the QQQ May $335 and selling the $325 put costs just over $3 per contract. That is the maximum risk that could deliver $7 of upside if markets correct. The idea is to give the investor a few hours to adjust positions on bad days.

The concept is similar to buying insurance on a car. We pay the monthly premiums accepting the the intention is for us to lose money on the deal. Except here, the investor can change their mind. They can sell the spread at any time and recover partial gains or losses.

There is a difference between buying bearish positions versus shorting markets. I can’t stress enough the importance of that distinction today. I worry about the next few weeks, but I would be buying the dip when it comes. Then, most investors would be rushing to buy protect too late. That’s when smart investors who already have it would be selling it to reinvest in equity.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Nicolas Chahine is the managing director of SellSpreads.com.


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