Market Observations

by Wayne Ferbert on October 23rd, 2013

Market Observation #1: Near all time highs + VIX near lows = Good time to hedge
We make this point a lot on this blog but that is because we are Buy & Hedge! If you bought the $160 SPY outs for December 2014 expiration, you would pay $8.05. That is roughly 3.9% on an annualized basis. That is also downside protection that starts at 8% downside.
That is about as attractive as we have seen in the past year!
Market Observation #2: Markets have priced in a 2014 Taper now
When you look at yields and the market rally, you can see no expectation that borrowing is going to get any more expensive any time soon. In fact, the sentiment among Wall Street economists is now March 2014 start for Taper. And everyone expects it to start slow once it starts.
On top of that, everyone thinks Yellen is a real Dove – so expect Taper to get pushed put for any material hiccup in the economy. The recent jobs growth disappointment is metric #1 pointing to a further potential delay. If the next month’s numbers back up the disappointment again, expect March 2014 to push out further.
What does a delay to Taper mean? Cheap money enters the risk asset side of the markets: Equities!
Market Observation #3: We prefer portfolio hedges to ETF level hedges right now!
See #1 above. Buying hedges on broad market indexes are attractive right now. And we wrote earlier this week that this has been a year to go after individual investment decisions – like stocks or sectors or sub-sectors.
If you are exercising your inner guru, think about hedging with a portfolio hedge. In other words, let your only hedge be the broad market collapse kind of hedge. This way, your individual investment decisions have room to run if you are right – but you are still protected from market collapse.
When should you hedge your specific investment? When the investment is an individual stock with a large enough concentration to make you nervous about its impact on your portfolio. Otherwise, be satisfied with long-dated (think Dec 2014 and later) protective puts on your portfolio in the S&P 500.

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