Hedge your bets

June 21, 2012No Comments


Spiking bond rates with Italy back above 6% and Spain soaring to over 7% last week brought rates to the same level before Greece, Portugal and Ireland got their emergency bailouts. Of course, Spain and Italy have  much larger economies, so the impact of their problems is magnified. Thus their almost inevitable bailouts are going to be larger and more impactful. As governments around the world work to implement the necessary bailouts to save their economies, fear will be on the rise and stocks will likely churn up and down.

 While the recent head/shoulder breakout would normally be bullish for the S&P (see chart above – note the breakout over the 50 day MA as well), there is enough event-risk that makes this formation less reliable. That is why I am not bullish just yet. I continue to take a defensive stance. I do maintain enough exposure to participate in some of the upside if markets rise. But I’ve done this by holding a low-beta stock portfolio (my current equity model measures about beta 0.50), which includes a couple of hedging strategies. I accept that I am unable to predict with any certainty what will happen in the coming weeks. If markets rally, my stocks will go up and will be offset to a small degree by my hedges going down, and vice-versa. This is the only way I can see playing the current uncertainty. 

 Having presented this “on the fence” viewpoint for the near-term, I do continue to view a brighter 1-year target for the markets. My 14 year chart (below) shows that, despite recent volatility, we are clearly in a mid-termed bull market – via the 3 higher highs and higher lows  put in since 2009. My target for the S&P 500 remains 1500 -1500, as noted on the chart. Should the trendline remain intact, I would expect this target will be reached by next spring.

 Longer termed, my view is for a test and decline from that 1500-ish level, but we’ll worry about that later.


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