The Seasonal Trend is about to push against the long-term Cyclical Bull trend. Which will win out?
For now, the major cyclical trend for equities remains higher and I continue to lean in that direction. But … as it relates to long-term focused core equity exposure, if you have yet to do so, I believe it is important to put a hedge in place by month end.
See graph below, S & P Seasonality During Mid-Term Years.
Risk of a 5% to 20% correction is high.
Although the longer-term cyclical bull trend remains in place, the Fed remains accommodative; sentiment and seasonal patterns support a correction. Further, this cyclical bull is aged and valuations are high, margin debt is at a record high and sentiment reflects a fairly optimistic investor.
What you can do.
Ideas range from covered call oriented funds and ETFs, funds focused on core equity exposure with a built in risk management processes, out of the money put options and/or inverse ETFs. Send me a note if you’d like to discuss further. Also, See CBOE website or search collared option strategies. I favor hedging with index based ETF options like those on SPY and IWM. Highly liquid and inexpensive to trade. Note options are not suitable for all investors, they involve risk, never write naked options.
Further, I believe most investors are ill-prepared for the end of QE.
The end of QE is no small event (see here for the Likely Path to Higher Interest Rates). Neither the stock nor the bond markets do well in an up interest rate environment. My best guess is that the serious fireworks begin in mid-to-late 2015 (tied to an aggressive Fed exit). The stock market will reach a point where valuations are lower and attractive. The bond market will at some point reset at higher rates. When this happens there will be far less risk in the exposure and the need to hedge will abate.
For now I believe it wise to have your long-term equity exposure hedged in some form. Find mutual funds and ETFs that incorporate hedging into their investment processes and/or consider a collared option strategy that you trade yourself to directly hedge your important long-term equity exposure. Overweight tactical strategies and include managed futures strategies to deepen your portfolio diversification.
The seasonal traffic light is flashing yellow. Move ahead with caution. – Steve Blumenthal