SH- Portfolio "Insurance" Could Pay Off with Investors All-in on Stocks
The January Personal Consumption Expenditures (PCE) Index rose 2.4% from last year. The core PCE Index, the Fed’s favorite inflation indicator, rose only 2.8% from last year. That was the lowest annual increase since the 2.2% increase in March 2021. But the stock market did not explode higher until the usual end-of-day ramp, and that was the “dog that didn’t bark,” suggests Michael Murphy, editor of New World Investor.
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Scotland Yard detective Gregory: “Is there any other point to which you would
wish to draw my attention?”
Sherlock Holmes: “To the curious incident of the dog in the night-time.”
Gregory: “The dog did nothing in the night-time.”
Holmes: “That was the curious incident.”
– From The Adventure of Silver Blaze by Arthur Conan Doyle
The market action tells you everyone who wants to buy stocks right now has done so, and they’re waiting for someone else to push up stock prices. But for now, “someone else” seems to be AWOL. The most likely short-term path forward is down.
Most investors are asking the second-biggest question: “How long can the current uptrend continue?” That means my recent recommendation of some portfolio insurance seems especially timely if you are worried about a decline lasting a few months. Whether you buy the ProShares Short S&P 500 ETF (SH) or the ProShares UltraShort S&P 500 ETF (SDS), you should do okay.
Remember that portfolio protection is insurance, and the cost of it is the insurance premium. Just like you don’t want your house to burn down so you can collect on your fire insurance, or your car to be wrecked, you don’t WANT to make money on portfolio insurance. It’s there to let you stay invested in this secular bull market that won’t hit a major top until 2036. Consider the cost of portfolio insurance as an expense – gone money you never will see again.
Fed officials have signaled they do not need better news on inflation to cut rates, just continued good news. The trend in inflation still is downward and that’s good news. But I still don’t think they’ll cut the Fed funds rate until August or September, and Wall Street still believes there will be three cuts this year starting in May or June. That could keep a lid on stock prices for a while.
See also: QQQM: A Cheaper Way to Play a Market That's Likely to Rally Hard
Recommended Action: Buy hedges like SH or SDS.
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