Market rally is well timed

Posted on November 19th, 2012

I'll be the first one to tell you that I don't really understand today's rally. It is a great rally and I am happy for it. In fact, I am even happier than most - and I'll explain why this timing is great for the Buy & Hedge investor.

But before we celebrate the timing, let's re-visit the rally itself. It is broad and strong. The news media says it reflects new-found optimism that a solution to the fiscal cliff is coming. Yet there really is no 'new news' on the fiscal cliff from Washington, DC.

I think we can expect some days like this as Washington marches to a compromise. And I think we can expect the opposite. There will be some days that news leaks that Republicans/Democrats have walked out on negotiations. Those will create the counter-rally effect.

Don't get too caught up in the wash either way. Focus instead on the economic drivers: GDP growth, Corporate earnings, Employment metrics, sentiment, and consumption indicators. These measures are all still middling - with the exception of sentiment which has been steadily improving on the consumer side despite the poor employment numbers. The other indicators have continued to show more weakness than strength.

When you have weak economic indicators, the reason for any rally tends to get pinned on 'other factors' like the Fiscal cliff.

But today's market move is well timed for the Buy & Hedge investor and we won't look a gift-horse in the mouth.

Options expired over the weekend so your covered calls expired - and today/tomorrow would be the natural day to roll your calls. We use the covered calls to generate the premium to pay for our put protections. This worked out great! We always like selling calls in to a rally because calls tend to carry more premium on those days. Plus, you get to sell at a higher level.

Also, if you had any put protections as part of your ladder that expired over the weekend, today is a great day to buy your new 'ladder rungs' in the out months. The natural move up in the market means you get to set your put protection at a higher strike.

In other words, we can be excited about a rally on the one day a month when your collar is potentially 'naked' (ie, not invested in puts and not short calls). That is a good reason to celebrate. But don't get too greedy. Look to get your positions re-established today and tomorrow. If we are ever exposed without hedges in our laddered protection, we never want it to be for too long.

Happy hedging!

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