Cost of Hedging Update 8-19-13

by Jay Pestrichelli on August 19th, 2013

After one of the worst weeks for equities of 2013, we saw the cost of hedging rise, but not as high as one might have thought.  As of the close of business on the 16th the short-term daily cost was 0.89 basis points per day and the mid-term cost out to March 2014 rose to 1.17 basis points per day.  
See data for the past 25 months on our Resources Page

While the rise in the cost of hedging is about 20% for both the short-term and mid-term, it remains significantly lower than the rates we saw back just 2 months ago at the end of June. In part, this is because the market has only dropped 2-2.5% along with only mild rise in volatility. This is illustrated through the VIX that has only been up 10% from last week and 25% since the recent low on August 5th.
But the question we always get is where is the market going from here? Are we spooked by this move? On August 8th we warned that there were two signs to watch for that the market might drop lower. The first was that it would break out of its upward channel and the second was we were seeing the cost of hedging start to turn upward. Click here for a review of that post.
So is there another warning here? Not necessarily. A 4-6% sell off shouldn’t be unexpected after we pushed to new highs as recently as 2 weeks ago. Over the past 10 months, sellers have continued to hop back in with new money after any breather has given us. I’m not sure this time is any different. However, we haven’t gone down 6% yet to know.

Technically speaking, Friday closed just below the 50 day moving average, another level of support that has been in place all year. But any close lower today could lead us to test a more round number of 1600 on the S&P. The chart below shows that level and coincidentally, that is 6% down from the high of the year. I wouldn’t be surprised if that level gets tested over the next month.
For you mid to long-term hedgers, remember anything under the 1.00 basis points per day mark is still a low rate historically, so if you don’t want to ride the market lower (if it is actually going lower-that is yet to be seen) get those hedges in place and remove he day-to-day worry. 

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