When I originally built the hedge back at 4,300 there was a great fear that this could be the next bull market, states Steve Reitmeister of Reitmeister Total Return.
And thus the stock selection for the hedge was a mix of aggressive and defensive positions.
Now that sanity has been restored, and people better appreciate the bearish downside that is inherent in high inflation and hawkish Fed, then I want to reinforce the long part of our hedge by making the following trades:
- Sell all shares of ICL Group (ICL)
- Sell all shares of Pilgrims Pride (PPC)
- Sell all shares of STMicroelectronics (STM)
- Buy 11.5% allocation to First Trust Consumer Staples Alphadex Fund (FXG)
- Buy 11.5% allocation to Invesco S&P 500 Equal Weighted Utilities ETF (RYU)
The hedge is now better built for the increased likelihood of downside. That is because the gains from the three inverse ETFs (PSQ, RWM, SH) should be greater than the more moderate losses of the defensive holdings in Consumer Staples (FXG) and Utilities (RYU).
Today is a great example of these two funds losing only 40-50% as much as the average stock. This will work out wonderfully well if indeed we retrace to the previous lows of 3,636 and likely lower. Meaning even better than the previous construction of the hedge (which was pretty darn good like today's gain of +0.62%.)
Also, this is a nod to the additional risk found in individual stock selection versus the safety in numbers found in ETFs. ICL is a great example. On the surface, it looks like a stellar stock packed with all the goodness of high POWR Ratings. And yet it has behaved quite badly the last couple of weeks even as the stock market bounced from the recent bottom. I want to mitigate that risk by moving to a diversified investment like the new ETFs (FXG and RYU).
All in all, this is a better constructed hedged for the increased odds of an extended bear market.
