On Second Thought...Let's Create a Hedge

I do believe the move to get back to neutral on Friday was the right one for the interim as bulls have taken the upper hand, states Steve Reitmeister of Reitmeister Total Return.

This is why TheDowTheory signals finally flipped from bear to bull on Friday.

However, there is serious resistance overhead at the 200-day moving average (4,328). This sets up for some consolidation and range-bound trading under that mark as investors decide what happens next.

Meaning there is not enough evidence in hand for anyone to seriously consider going back to the previous highs of 4,818. On the other hand, the bears have an interesting premise about inflation creating a recession and bear market. But as of yet the recession has not truly landed (because there is no job loss at the moment). This is why the bears lost their grip on the market in the meantime.

I realized this weekend that there is more than one way to play neutral. And upon second thought I would prefer to do it with a hedge (equal parts longs and shorts).

Reity, what is the benefit of creating the hedge over just leaving 78% in cash as we did on Friday?

If done right the hedge can allow you to produce a little profit even in a trading range. We have decent odds of that being the case as we will be adding five stocks packed with the benefit of top POWR Ratings. Each of them came from the potent strategies inside our popular POWR Screens Ten service as I wanted as many of those 118 factors inside the POWR Ratings to give us a chance to outperform.

So these five stocks could very well outperform the three vanilla inverse ETFs we are using which represent the movement of the "average" stock. The point is, that we are buying the stocks that are statistically the best and shorting the average stocks in the main stock indices allowing us to profit unlike if we just stayed in cash.

Reity, why not short the worst stocks in the POWR Ratings?

Because I have been doing newsletters for over 20 years and have found out that virtually no one will short stocks. There is just something about it that causes folks to pause. However, they will buy inverse ETFs. So that is why we are using this approach.

Here are the eight trades that will constitute our hedge portfolio:

• Buy 13% allocation to ProShares Short S&P 500 (SH)
• Buy 13% allocation to ProShares Short QQQ (PSQ)
• Buy 13% allocation to ProShares Short Russell 2000 (RWM)

• Buy 8% allocation to Albertsons (ACI) 
• Buy 8% allocation to Jabil Circuit (JBL)
• Buy 8% allocation to Pilgrims Pride (PPC) 
• Buy 7.5% allocation to ICL Group (ICL)
• Buy 7.5% allocation to STM Electronics (STM) 

We will not spend any time on the specifics behind these five stocks because it is the concept of the five of them together that matters the most. The first is 39% long. Second, all A-rated stocks come from the proven strategies inside POWR Screens Ten. And third a blend of industries including a couple of low beta picks (ACI & PPC) that should perform better in a range-bound environment that I expect to soon be in hand.

You will note that we used the 78% of the cash remaining to buy three inverse ETFs worth 39% short and matched that up with five stocks that equate to 39% long. Thus, an even hedge.

If we do break above the 200 moving average with gusto and there is more reason to be bullish, then we will start to sell our inverse ETFs and start adding more stocks.

On the other side, if my thesis is correct that this is a long-term bear market and we start to retreat, then we will do the opposite. Which is to sell off the stocks and perhaps add more inverse ETFs. Proof of that would likely be falling back under 4,000.

Simply you can think of a hedge as the start of a tug of war with both sides equally matched. Whichever side starts pulling ahead...then we jump on the bandwagon to join the winning team.

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