Hedging

Hedging

Hedging is an attempt to protect your investment positions by making a counterbalancing investment within your portfolio. Why do I mention that at this time?

One of the jobs of an investor is to evaluate the current state of the market environment. Most of the time there is nothing to be concerned about. But every once in awhile the risk of a market sell-off becomes elevated and an investor would be wise to hedge his positions if for no other reason but to protect himself from himself psychologically. A violent market selloff can be a scary thing and will tempt the individual investor to run with the herd and head for the exits. Hedging your investments ahead of time is a way to protect yourself against this before it happens.

I keep track of the momentum of the breadth of the NYSE market (advancing  - declining volume) on a daily basis and smooth this data with various moving averages. I then subtract the longer moving average from the shorter one and this produces a trend deviation indicator (a form of market momentum). I use this to help me gauge the internal trend of the market. Both the direction and level of this indicator are of equal importance.

At this moment in time (April 9 2017) the underlying market is seriously deteriorating (money is flowing out of the market). It’s been going on for awhile. I feel a sell-off is eminent. Two weeks ago I bought an ETF that shorts the Russel 2000 index (it trades on the NYSE). It is a non-levered ETF that re-balances once a year so it is safe to use. Its symbol is RWM. I bought it a couple of weeks ago and have added to it since.

This is a way of managing my risk when I feel that the risk in the marketplace has become too elevated. It has nothing to do with predicting the future and is not a forecast.