Just over a week ago we moved one step in a more defensive direction to create a hedge that was 33% net long the stock market, states Steve Reitmeister of Reitmeister Total Return.
Under the banner of "Murphy's Law," the market of course immediately had a dramatic bounce, making this move look foolish. Yet, unfortunately, the evidence of a bear market looks all the more likely to me, leading to this next defensive adjustment to become 0% long the stock market. Meaning that the long and short portions of our hedge are equal. This fits in better with my view that bear market odds are at least 50% if not higher.
Here are the trades associated with this move:
- Sell all shares of Kulicke & Soffa (KLIC)
- Buy 5.5% allocation to Direxion Daily S&P 500 High Beta Bear 3X shares (HIBS). Since 3X then equivalent to 16.5% short.
- Buy 2.5% more allocation in ProShares UltraShort S&P 500 (SDS). Now 10% total allocation
- Buy 2.5% more allocation in ProShares UltraShort Russell 2000 (TWM). Now 10% total allocation
Why Sell KLIC? High beta technology stock is going to see a severe downside with an extended bear run. So let's take our modest profit off the table as it may not last much longer.
Why Buy HIBS? This is a unique high beta three-times inverse ETF. If you are right about the market downside you will be downright killing in these shares. If you are wrong...then you are the one that gets killed. That is why we are taking a modest allocation of 5.5% which at three-times leverage = 16.5% short. So net-net it provides a touch less short exposure than SDS or TWM. But adds a bit more excitement to the mix if indeed a bear market is what comes next.
Closing Comments
I know it's been a little while since my last RTR commentary as I was off earlier this week moving my oldest daughter to Denver to start her first job after college. Unfortunately, there is more and more economic evidence that the economy is softening since we last spoke. Look no further than GDP Now being cut in half over the past couple of weeks to only 1.3% growth for Q2.
To clarify, I am not saying with absolute certainty that a bear market is coming and we will head below 3,855 for an extended period of time. I am saying that the odds of that happening have increased and I think that the balanced hedge we are creating is the right solution. If a bear market does emerge, with a significant break under 3,855, we will get rid of more stocks and become more net short the market actually making profits as we head lower. But if there is convincing evidence that this was nothing more than a bear market scare, with bull re-emerging...then we will do the opposite. Sell off the inverse ETFs and add more long stock positions to the mix.
Yes, this is a precarious position...but one that is manageable as long as we look at the facts objectively as they roll in.
