Alright I did it. I bought some index puts to hedge my portfolio. There...fuck off now George Costanza. For now it's a rather small hedge making up 2% of my account value. They may very well end up being a sacrifice to the trading gods because I have to admit there's a bit of paranoia in this trade.
I bought some Aug SPY 155 puts and did so in the first 15 minutes of the trading day which means I got subsequently ran over, but it's all good. I have to treat this position as portfolio insurance, not as an individual position. I have to admit, I have a hard time doing this because I have rarely used hedges in the past 4 years. I have opted instead to raise cash if I had general market concerns but I don't wish to do so this time because the stocks I own (only 2 of them) are still quite cheap and have been able to trade fairly independently of the market. Why then buy index puts if the stocks I own have been able to trade on their own accord? Because you never know. That's the reason you get any type of insurance. If the market was to have a deep correction it's not hard to imagine my non-market correlated stocks will eventually get sucked into the market downdraft.
I pulled the trigger today for a few reasons. First, I can't deny that the economic data has for the most part, been weaker than expected. The market has been able to shrug it off for a month now which could suggest it believes the weakness is only temporary. It's also possible that the market is wrong (yes wrong) and has been able to ignore the bad news because of the strong upward momentum fueled by stubborn top picking. If that's the case, it's just a matter of time before it will acknowledge reality. We saw this behavior in the past few springs whereby there were flare ups in Europe and other bad news but the market ignored it and kept chugging along untill it eventually couldn't ignore the bad news any longer. So, we will only know in hindsight whether the market is correct or not in ignoring the bad news. Given the strong run up we've had YTD and given my long exposure, having at least a small index hedge makes prudence sense at this point while we see which fork in the road Mr Market will take. Another thing that prompted me to pull the trigger was that NAAIM spiked to 80% longs and Rydex traders bought Wedneday's dip which is something they don't do often and the fact that these wrong way traders got away with it makes likely that Thursday's rally will get completely undone and then some in the near future. AAII sentiment is only at 1:1 bulls/vs bears which is still supportive for the market rally and bonds are still strong and so it's certainty not a slam dunk for the bear case in the ST/IT. In fact, we could easily power higher still given the condition of these 2 indicators.
The bottom line is that I no longer feel comfortable with an unprotected 80% long position while we enter a seasonally weak period with the market overbought while the economic data has been deteriorating. While a 2% hedge is not much, the puts have quite a bit of leverage and I may be inclined to add more. I still don't believe that any market weakness we will see is going to be severe given the bullish points I made in my previous post. In, fact I think there's a pretty good chance we will only have a mild 3-4% dip this summer, but given my situation, I don't want to risk being wrong while unprotected.
I've said this before a few times - know yourself. If you know you'll be weak if the market moves against you, you have to either reduce exposure or hedge otherwise you'll end up making an emotional trade.
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