Weekly Issue: The Need for Even More Downside Protection
Key points inside this issue
- We are issuing a Buy on and adding the ProShares Short S&P 500 Jan 2019 30.00 calls (SH190118C00030000) that closed on Tuesday at 0.55 with a stop loss at 0.35.
It’s not often we get a mid-week break for the stock market, and the reason behind yesterday’s stock market closure was a solemn one. It did offer a respite from the wild swing we saw in the market between Monday and Tuesday, which resulted in a demonstrable move lower for all the major market indices. As I shared on Monday, despite the seeming forward motion on US-China trade, there remains much work to be done and a number of headwinds that, as expected, are leading investors to question 2019 EPS growth prospects.
Yesterday, China’s Commerce Ministry released a statement calling trade talks between Presidents Xi and Trump at the G20 Summit in Argentina “very successful.” The statement said the Chinese and U.S. trade and economic delegations will “actively advance the work of consultation” in 90 days in accord with “a clear timetable” and “road map” but offered little concrete details. Odds are this will add to the uncertainty that led Monday’s rally to finish the day off its highs and helped drive the market lower on Tuesday.
In my view, this will keep the market on pins and needles as we digest the coming economic data points to be had that I shared on Monday as well as those for next week that include November reports for inflation, Retail Sales and Industrial Production. As more investors question earnings growth prospects vs. the current stock market multiple, the risk is we could see more downside, especially if those same investors suspect tariffs will indeed be eventually raised to 25% from 10% along with further interest rate hikes. A recent survey of 500 institutional investors by Natixis showed that 65% see a change coming, with the biggest threats being geopolitical tensions and rising interest rates. Between the wage data to be had in Friday’s Employment Report and next week’s PPI and CPI reports, we also run the risk of seeing potentially hawkish comments following today’s latest Fed Beige Book. That report showed tariff driven price increases have spread more broadly through the U.S. economy.
As I mentioned above, it looks like the market will continue to sea saw and my response is to add some downside protection in the form of the ProShares Short S&P 500 Jan 2019 30.00 calls (SH190118C00030000) that closed on Tuesday at 0.55. Given the potential for the market to whipsaw of late, I’m setting a stop loss for this position at 0.35.
Over the coming days, I’ll continue to look for other ways to add downside protection. On the long side, I’m likely to hold off adding a new position until the market is on steadier footing. As Warren Buffett has advised, the first rule of investing is, don’t lose money. The second rule is, don’t forget rule number one, and both mean it would be prudent to be cautious in the near term, hence this new downside protection call position.
- We are issuing a Buy on and adding the ProShares Short S&P 500 Jan 2019 30.00 calls (SH190118C00030000) that closed on Tuesday at 0.55 with a stop loss at 0.35.
