Why and How You Should Protect Your Portfolio Today

We’re almost to the weekend, but I fear today could be rough.

If you’re like me, you’ve felt like the market is running into a wall in slow motion.

My “Market Spidey Sense” has been going off for the last few days. Nine times out of ten, that sense proves itself right. So, I just bought some portfolio protection for several of my accounts yesterday.

I’ll explain how and what I used to add some protection in a minute. Let’s look at why protecting your account is prudent at this moment.

Let’s talk about “Goldilocks.”

The last two months has heard the term “Goldilocks” bandied about when referring to the current market conditions. “We’re in a Goldilocks market” - is the battle cry for the bulls that can’t explain why stocks are defying gravity.

At least that’s the way I hear it.

Funny thing is, everyone thinks about Goldilocks in a peaceful slumber once she found the bed that was “just right” - the market in this case.

Nobody talks about the end of the story…


“Goldilocks got such a fright, she jumped out of bed and ran to the window.

She climbed out of the window and she ran and ran and ran.

The three bears never saw Goldilocks again.”

Or, if you prefer the original ending…

“the bears throw Goldilocks in a fire, then douse her with water

and finally impale her on the church steeple”


You get my point? The Goldilocks story doesn’t end well in either version.

And that Market Spidey Sense, well, it’s telling me that we’re on the last page of the story.

Here’s why…

First, The Jobs Report

This morning’s employment report is HUGE. Much larger than has been talked about.

Expectations for this morning’s report were all over the place. Looking at the analysts’ breakdown, expectations for the number of jobs created were between 150,000 and 245,000 on Thursday.

You may not realize it, but there is normally a 10% range on these expectations ahead of the data release. This time around, the range is more than 50%?

That tells you that Wall Street had no idea what was coming down the pipe.

One thing I’ve learned over the last 30 years is that when Wall Street hasn’t figured it out, it’s because we’re at the end of the story.

There was a “too hot” and “too cool” scenario for the jobs report, and both include a 10-15% stock correction.

Next, Did You Catch The 1-2 Punch from the Fed Yesterday?

Yesterday, we saw not one, but two Fed Presidents come out with comments on interest rates. Both suggested that the Fed is going to hold off or even reduce the number of cuts we’ll see this year.

Fed President Barkin said, “Fed has time to mull rate cuts in face of 'less encouraging' data” and that the Central Bank has time to let the “clouds clear.”

Neel Kashkari, President of the Minneapolis Federal Reserve Bank, was blunter in saying that he had penciled in two cuts at the last meeting, but if inflation continues to stall, none may be required by year end.


First off, inflation is stalling. The trends in pricing, especially housing, are not slowing, and in some cases, they’re on the rise again.

The market has gone from pricing five cuts to four, and now its precious three cuts are being threatened.

Lower interest rates have been fully priced into current valuations, especially in consumer discretionary stocks. Any sign of rates not going lower will sting the market.

Next, The Middle East

I think we’re all in tune with the situation in the Middle East. So far, investors appear to have been dancing to the war drums, almost like they’re at a Grateful Dead concert.

But there’s a point when the music stops, and everyone is going to be looking for the market’s exit.

Last night news hit that Israel had moved to evacuate their embassies in preparation for possible revenge strikes from Iran.

There were several other headlines about tensions boiling over.

I think that we can all agree: Any widening of the current clash in the Middle East would be terrible and possibly more severe than any that we’ve seen in the last 30 years.

It feels like it is different this time. The political situation in the U.S. and other countries is hamstringing the diplomatic efforts that might normally bring ease to the tensions.

Here’s How to Prepare

First, hedge.

Put simply, a hedge helps to soften the blow of a large market correction on your portfolio. It adds a position or two that will increase in value during a correction while your portfolio holdings are losing value.

The most important part about using a hedge is closing the hedge when the market is still down. If you hold your hedge until the market recovers, you’ve done nothing to improve your outcome.

As I said, please understand before moving forward with a hedge.

That said, here’s what I added to my own portfolios yesterday…

Inverse Exchange-Traded Funds (ETFs): There are a select few inverse ETFs that allow you to simply buy a share that will increase in value as the market goes down. That’s it, they’re the simplest hedge.

Yesterday, my choice was the ProShares UltraShort QQQ (QID). This ETF is a leveraged inverse fund that goes up roughly 2% for each 1% the Nasdaq 100 falls. I used this in my technology-heavy portfolios to ease the correction risk.

My plan will be to sell half of these if the Nasdaq 100 hits $350, and then the second half at $300. That will net gains of 45% while the Nasdaq 100 dropped approximately 25% total.

Bottom Line

This market has been incredibly resilient, but it’s time for Goldilocks to wake up and run into the woods.

I’ve chosen this week to add a hedge to my portfolios after a few weeks of us talking about a “healthy correction” on its way.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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