Cost of Hedging Weekly Update 8-9-13

by Jay Pestrichelli on August 9th, 2013

The market’s continued rise has kept the cost of hedging low since our last update.  As of the close of business on the 8th, the short-term daily cost was 0.73 basis points and the mid-term cost out to January settled at 1.00 basis points per day.  
See data for the past 25 months on our Resources Page

From the chart above, you can see that the last time the cost of hedging touched the 0.60 bps, there was a drop in the stock market with in the next few days. Arguably that has already started as the S&P 500 is down from its high of 1709 on August 2nd, but there’s no conviction in that move yet.

If we zoom back to November of 2012 and look at the trend, one we’ve drawn on before, you can see that the S&P 500 is right up against the low end of the upward channel. This means technicians are waiting for a decision on which way this is going to go. A break down through that line like we had back in June could lead to another 5% sell-off.  The technical gurus will tell you that we need to close below that trend line and then confirm it with one more day close below.
That rule of thumb is why many technicians got burned in the late June sell-off. If they went short after the second day post breaking the trend-line, they were on the wrong side of the market as it went straight up from there. However 8 times out of 10 that rule seems to work, so look for that to be followed.
Bottom line, watch for this inflection point to give a direction in the next few days despite the August low volume. Some will say it doesn't count because everyone's on vacation, but the market price is what it is, so ignore at your own peril.

Oh-and as a side point, hedging is still cheap if you preferred to just lock in these levels and not worry about timing. 

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