Although global economies and politics currently look rather stormy, the economic and stock market in the U.S. looks quite bright, at least for the short term! For readers who, such as myself, should be concerned with Capital Preservation, it might be prudent to start considering a Hedge, if not a Redwood Highway.
Clouds On The Horizon:
Several Technical signs do show weakness: early Feb. was the first of any corrections that showed a Lower Low in price since October of 2011; the McClellan Oscillator and Summation (cumulative readings) that I profile in my weekly Sentiment blog: http://mktsentiment.blogspot.com,
show five tops in market breadth - these are Advances versus Declines- four of which resulted in material downturns, the other in a sideways price movement, for the past year. We have just experienced another of these tops. Corporate Insiders have resumed the Selling from year end, with a 130 to 1 ratio over Buying last week; half of which came from ESOP (stock option) exercises, with another 25 sales from the 10% stockholders (less informed $$).
Looking over this new Century, markets look pretty dreary, as noted in Martin Pring's "Lost Decade"; however, since 1994, the recent Bull market has risen dramatically - the DJIA (Dow 30) is up four-fold, from below 4,000 to over 16,000; the S&P 500 also up 4X from 450 to 1850, and the Nasdaq up 6-fold - 700 to 4300, the only one not at all-time highs.
Much of this recent rise is due to Fed manipulation of debt and interest rates, and could come tumbling down again - Bear markets in the past decade were both of the 50% variety. Also, there have been at least one, no more than two Bear markets (20% or more) in every decade since 1900. As mentioned in a previous Examiner column, also since 1900 there have only been three times where the markets have risen 5 straight years - '20s, '40s, and '80s - with a 9-year stretch in the '90s: we all know how these ended up!
One other example of excess, from my weekly Barron's mag: the Wilshire 5000 (proxy for the stock market) went from @7600 stocks (?) in 1998 down to only the current level of 3600, but the Price has DOUBLED in that timespan.
Finally, there are several ways to hedge a stock portfolio if things start to get ugly - mid four year cycles (Presidential) tend to do that, especially during the summer or in October. One way, which can get expensive is to buy Index put options far out, or conversely buy call options on the VIX Index, which rises when stocks fall; or Inverse ETFs (Exchange Traded Funds) also are contrary securities.
My preference for hedging, which I explained this weekend in a presentation before the San Francisco Bay Area Option Group, is selling long term options (Leaps) against positions, which bring in money and provides a cushion against most declines - moreso than the DITM (deep-in-the-money) strategy I have written about for five years. Again, see previous columns for more detail on these two. Or check out: http://ditmcalls.blogspot.com
EXAMINER COLUMN: Each week this column serves to announce local Bay Area investment meetings, mostly Technical and Options-related for the weeks ahead; it also attempts to highlight Contrary Behavior Indicators (as opposed to making market predictions) by concentrating various comments and data in one place: http://mktsentiment.blogspot.com/
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