S&P at $1600 , oh my ...

by Wayne Ferbert on May 3rd, 2013

This market rally today is being fanned by today’s job numbers. The number was slightly better that expected – but still middling at 160,000 new jobs. However, the revision to February to over 330k new jobs has got everyone worked up. If you exclude the census hiring from a few years ago as a one time blip, then this February revised number is the biggest since 2005.
 
But I say the jobs number is ‘fanning’ the rally as opposed to ‘fueling’ the rally. The fuel for this rally continues to come from the Bank of __________ (insert your favorite country name here).
 
When the Fed inflates the markets, you tend to see all sectors benefit. However, once investors think the ECONOMY might be improving, then we see some different sectors benefit. And we are seeing a little bit of that today. The CYCLICALs tend to benefit the most when this happens.
 
Today, the defensive sectors are underperforming: Consumer Staples, Utilities, & Healthcare. Meanwhile, the cyclicals are benefitting: Industrials, Energy, Materials, & Consumer Discretionary are all out-performing the broader S&P500 today.
 
If you think this economy is going to improve AND you think the market believes that also, then expect a rotation from these defensive stocks in to these cyclicals. If not, then look to get defensive – but do it using hedges. Don’t get defensive buying the defensive sectors at these all time high levels.
 
Instead, look to yesterday’s article on the cost of hedging – which is at nearly historical lows. You can buy protection on the S&P500 for 19 months out from now at about a 4% downside from here (think 1550 on S&P500) for less than 5% annualized cost. Think about that! As long as you think you can generate 3-5% in annual returns from selling covered calls on your positions, you could fund a very tight hedge.
 
I know talking about hedging when the market is hitting new highs is not really popular – but give me a break: we are the Buy & Hedge guys.
 
Always stay hedged, my friend …
 



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