As I shared in my last commentary on 2/14, I believe that bulls already had two strikes against them and the third strike may be on the way Thursday with the release of the PPI report, states Steve Reitmeister of Reitmeister Total Return.
Indeed, that report does show that inflation is too sticky...this means hawkish Fed policies will be in place longer than most investors appreciate...this means that the odds of future recession and lower stock prices have also increased.
As such I think it prudent to enact the following trades to move from the current 36% long back into a bearish hedge. Meaning that longs and shorts are equally balanced by % but if more downside is on the way...then shorts make more money than losses from longs which begets a profit (like we were from the middle of August til early February).
We will create the bearish hedge by making these two trades with available cash:
- Buy 18% allocation to ProShares Short QQQ (PSQ)
- Buy 9% allocation to ProShares UltraShort Russell 2000 (TWM). Since 2X ETF...then worth 18% total allocation.
Why TWM vs. RWM in the past? Because we recently took a very small loss on RWM and thus by the tax wash rules need to use a different ETF. Second, we don't have enough cash on hand to add 36% short with 1X ETFs. Thus, going the 2X inverse route with TWM worked out best.
This 36% net short allocation counteracts the 36% net long allocation in place to make it a balanced hedge.
The only oddity you may find is that I have left the ultra Risk On ARKK shares in the portfolio. This is a modest nod to the fact that the bullish argument is not dead...just less likely with the recent inflation readings.
If the bearish argument gains steam, as likely signified by a break below the 200-day moving average (3,944), then ARKK will be kicked to the curb to make even more money as the market declines.
Let's remember that not everything goes according to plan. So here is the contingency plan if the bulls continue to fight this tide, and we somehow break back above 4,200 (top end of the current range which also signifies an official new bull market given the 20% increase from the October lows).
Not only would we be glad we kept ARKK in the fold, but also we would shed these two most recent inverse ETFs. Next would be adding more Risk On longs, to make more money as stocks break higher.
Stock market clarity is only 20/20 in hindsight. In real-time it is never clear how a bear market becomes a bull...or a bull becomes a bear. The rationale is often hidden from common view til further down the road. And this is why it is wise to be mindful of price action no matter what the fundamentals might be telling you.
A case in point was the bull market that started on March 23, 2020, in the midst of the Coronavirus crisis. How could it start so soon when the economy was imploding???
The answer, which was only clear in hindsight, was that Treasury yields dropped so low that deep-pocketed long-term investors realized they would be better off with stocks even if they had to wait three to five years for the return to unfold. side. That logic was stronger than collapsing fundamentals ending the bear market.
It made no sense in real time...but made perfect sense in hindsight.
And thus we continue to make moves that seem prudent given the facts in hand...but always have a plan in place in case things go the other way.
P.S. Sometimes customers note the price of shares in the premarket emails doesn't match what they can pay for them once the market opens. That is because the price feed in our emails is connected to 15-minute delayed prices...which in the premarket is the previous day's close.
The simplest answer is to pay no attention to the prices in these emails. They have nothing to do with the recommendation. And have nothing to do with the price added or deleted used to calculate performance. That is based on the average of the open and closing price that day which fairly approximates what the average customer paid for shares.
Long story short, stay focused on the big picture of why we are doing the trades and enact them as soon as you can at whatever price.
