Looking at the markets

by Wayne Ferbert on July 25th, 2012

At Buy & Hedge, we don’t ever try to time the markets. But we do watch the key economic and market indicators to help inform our trades. That might sound like a contradiction but it isn’t. We use the indicators to help set our levels for our hedges and for selling calls – but we don’t use them to enter and exit the market. We are always long the market.

So, what do we watch the closest? Right now we are watching three things:

  • Earnings season
  • Key economic indicators
  • European Deb Crisis

Earnings season

So far, 70% of S&P 500 companies reporting have beaten estimates. The historical average is 59%. This would normally be good. But many companies have been giving cloudy forward guidance. This muddies the waters and doesn’t help the markets. And it explains the lack of hiring in the economic indicators.

Key Economic indicators

Lately, the most high profile indicators have been poor to average, at best. The poor: Jobs numbers and GDP growth. Neither have given any reason to believe that we aren’t potentially walking slowly towards another recession. Inflation has been muted, which has been one of the silver linings. Some other analysts think the slight recovery in home sales and construction might provide a lift. The home sales growth is not enough to drive this market higher on its own. Don’t buy the hype on that one.

European debt crisis

We have contended all along that the US can go higher even as Europe gets worse. It is all a matter of how much worse. The news out of Europe can’t get so bad that it looks like they will “throw up all over themselves”. Lately, Europe looks like it needs a bucket. Spanish borrowing costs continue to sky-rocket and Italy appears to be in worse condition – just better at avoiding the spotlight.

What does all of this add up to? A choppy market for sure. Do not expect a rally to start with all of these head winds. This market will continue to be range bound.

What does it mean for hedging? It means you should continue to set tight hedges. And in setting collars or bull call spreads, you can probably target selling calls that collect a little more premium since the market seems unlikely to run up too fast. Lastly, if you like to sell credit spread strategies that get paid when a market remains range bound, you can target using some of those right now also!

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