The stock market continues to hope that Christmas has come early this year. Or more precisely that the January effect rally, which normally kicks in around the middle of November is already in place and pushing stocks higher.
What’s the evidence? At this point it’s mostly speculation–but I don’t think investors should ignore the possibility.
I expect extreme volatility in oil prices this week. A Friday deadline looms for an agreement on the Iran nuclear program that would remove U.S. sanctions on Iranian oil. Every rumor of yes a deal, no deal will send oil prices tumbling or soaring. And a Sunday meeting of European foreign ministers on whether or not to shut Russia out of the SWIFT payments system would also likely sink of spike oil prices since this is the since this is the system European countries use to pay for Russian oil and natural gas.
In the week ahead expect the financial markets to pay more attention to the crisis unfolding in Ukraine. War between Russian and Ukrainian forces on Ukrainian soil remains a low probability event in my opinion but it odds aren’t nearly as low as they were a month ago.
I try to use big up and (especially) down days in the stock market to stress test my portfolio. One of the things I look to learn from a high volatility down days is how the hedges that I’ve put on to protect my portfolio work under big stress. So, for example, on a big day down day like July 16, when the Dow Jones Industrial Average fell 725 points, I looked to see if 1) the hedges I owned worked to reduce or better yet eliminate my downside losses, and 2) how much those hedges were costing me in opportunities for upside gains postponed.
2021 will be a very different year from 2020. Or to be more exact the second half of 2021 and 2022 will be very different. We’re looking at going from a financial market where investors and traders believed the Federal Reserve was on their side with cash and more cash to push the prices of financial assets higher and then higher some more to a market where everyone is asking when will the Fed take th punch bowl away and shut down the party.Let me be clear. At this point it’s not the certainty that the Fed will reduce its $120 billion in monthly bond buying in this exact month or that, or the certainty that the Fed will start raising interest rates before the end of 2022, say, but rather the worry that those events are on the calendar, that they will change the trend in the market, and that no one can predict when the turn will materialize.FDR said “We have nothing to fear but fear itself.” To which the market right now says “Exactly.” Look at this “fear and worry calendar” that I’ve put together. And today I’ve got 3 picks and one hedge for this market
Tomorrow, March 24, I’m going to add another hedge against a drop in stock prices, one that’s a more general market hedge against a more general market decline. The hedge is the September 17 Put Option (which goes up in price as the share price goes down) on the small cap Russell 2000 Index using the iShares MSCI Russell 2000 ETF.
The market seems to be very complacent about the risk of heightened volatility over the next couple of months even as the actual track record on volatility shows that the odds of big short term moves are increasing. Which leads me to add the July 21 Call Options on the CBOE S&P 500 Volatility Index (VIX) to my Volatility Portfolio today, March 16. The VIX, which measures how much investors and traders are willing to pay to hedge risk in the S&P over the next month or so, has dropped below 20 today to 19.59 at 1.20 p.m. New York time.
Yesterday in my YouTube video and in my latest addition to my Special Report: “Profit and Protect” I added the U.S. Copper Fund ETF (CPER) and the Invesco KBW Bank ETF (KBWB) to my Perfect Five ETF Portfolio. In that portfolio they will replace the SPDR Gold Trust ETF (GLD) and the Vanguard Intermediate Term Treasury Bond ETF (VGIT), respectively. The two new ETFs will keep the portfolio weighting of the out-going ETFs at 25% and 20%, respectively. You can find more about the logic of these hedges and about the specifics of these ETFs in my video and in my Special Report update. Tomorrow I’ll also be adding the Invesco KBW Bank ETF to my Jubak Picks Portfolio.
Hedges that can pay off on the downside and the upside are the most useful and most valuable. They also tend to be relatively rare. There aren’t a lot of these bets floating around in most markets just waiting for you to snap them up. However, I have found two hedges of just this sort in today’s market that I’m going to recommend to you today. (In this post I’m going to give you some of the nitty gritty numbers that support my recommendation for these two hedges. If you want to see some charts for copper and gold, banks and bonds check out the video I posted today.) I’m going to add these new recommendations to my standing Special Reports post tomorrow.
I’m starting up my videos on JubakAM.com again–this time using YouTube as a platform. The thirteenth YouTube video “2 Hedges for All Your Market Worries” went up today.
2021 is shaping up as an especially challenging year for investors. Much, much more challenging than 2020. I don’t think we can count on this rally running uninterrupted through the year. That would be simple, wouldn’t it? We’d all know how to profit from that scenario. And I don’t think the market is about to drop off a cliff from its current record highs. That would be traumatic. But, still, we do know how to protect a portfolio in that scenario. And even how to profit from a prolonged plunge–if we can bring ourselves to place those short and Put Options bets. Instead 2021 is likely to be one of those years with a Rally Stage and then a correction (or “something”) to be followed by a last quarter of 2021 that is, at this moment, close to completely unpredictable. That would make 2021 one of those years that gives investors a chance to be wrong several times over, to botch timing on the upside and the downside, and to let emotions power some really bad investment moves. I don’t pretend that I’ve got this year’s market stages down perfectly–although I think the outlines for the first two stages for 2021 are pretty clear. I don’t imagine that I’ve got the timing for navigating these stages clocked perfectly–although I do think I understand “generally” when the market is likely to switch gears. And that lets me lay out for you a likely pattern for 2021 and to suggest stocks and ETFs to use to navigate this year. Part of the point in getting as specific as I can at this point isn’t that I expect that I’ve got everything right, but to lay out concrete markers that will let you and me adjust portfolios as the year progresses. I’m dividing this Special Report into three parts.
I bought the ProShares Short Russell 2000 ETF (RWM) back on October 30 because I felt then that the market wasn’t pricing in any of the potential problems likely to hurt the U.S. economy over the next couple of months. I picked the small cap Russell 2000 index for my downside bet because it was showing the most sensitivity to news–good and bad about the economy. Well, I got the sensitivity part right. But I missed the effect of huge cash inflows on stocks in general and the Russell in particular. Right now potential bad news and even actual bad news doesn’t matter much. Stocks keep going up. At the close on December 9, Wednesday, I had a 19.89% loss in this position after today’s slight 0.69% drop in the Russell 2000 (and 0.72% gain in this short ETF.) I’m not willing to let this loss get any bigger so I’m selling this position.
