Dear Reader,
It's been a rather remarkable 24 hours. Momentum broke down yesterday, and the Russell 2000 has spiraled under 1,750. It was just two days ago that we anticipated some sort of climb higher, thanks to a positive spin.
But we went sideways, and the rug was pulled. The S&P 500 is back under pressure as well.
We're seeing money pour out of the Mega-cap stocks after a multi-week rally.
So now what?
The Trend is No One's Friend
What a reversal. It's a sign again that we have to watch the key technical lines for the S&P 500. In this case, we screamed back above 4,100, and we've pulled back since. This isn't normal. But it's just another sign of the ongoing trends of this market.
Despite relatively low volumes, we screamed back up in the mid-60s on the Relative Strength Index in quick time. Now, the market looks like it's ready to roll over again.
Now is the time to be hedging against any market downturn. In this environment, it's important that investors understand how to manage their portfolios. When momentum goes negative, there are a few different things that you can buy or trade to hedge against your portfolio positions.
- Proshares S&P 500 Short ETF (SH): This ETF is an inverse ETF that trades at a -1 to 1 performance of the S&P 500. For every 1% that the S&P 500 falls, the SH will gain 1%. When S&P 500 selling picks up, I prefer to purchase an equal weighted stake of SH to my other positions in a long-term portfolio. I don't want to sell my long-term positions, but I do want to hedge against a downturn. SH is relatively inexpensive, and it's a tool that I just added over at Flashpoint Trader.
- Options on the Proshares S&P 500 Short ETF (SH): There is an active options chain for this ETF. If you purchase the in-the-money call for the following month (March 17, 2023), you can replicate the performance of 100 shares of the ETF with a small amount of capital. The only difference is that it will require some ability to pay for time in the options chain. I don't like to use spreads largely because it caps the potential upside of the trade.
- ProShares UltraPro Short S&P500 (SPXU): Finally, there is the high-octane trade. The SPXU is an inverse 3x ETF that makes 3% for every 1% that the SPX declines. This is a way to hedge against larger positions against much bigger declines that typically come from negative momentum events. I don't like to own a lot of this, and I prefer to never hold it over the weekend. But it's a very good tool for day traders and individuals who have a lot more risk tolerance in this market. (learn to hedge your long positions in Flashpoint Trader)
Today's Momentum Reading
WORLD'S BIGGEST INDICATORS
Recap: The World's Biggest Indicator (Momentum) is Red...
This is madness. We're seeing a lot of chop right now, and it's hard to have conviction at a time like this. We have a jobs report approaching and concerns about the economy building. I'm still very bearish, but this chop is really difficult to navigate.
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The post And Now Momentum Breaks Again appeared first on Midday Momentum.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.