Protect Yourself from Coming Equity Declines

The stock market has been exceptionally volatile lately. The S&P 500 fell by 10.5% in the month of May only to rebound by 9% through Independence Day. The choppy market action is indicative of the bear market we are in. We have suggested that the developing economies of Brazil, Russia, India and China (BRIC’s) would help pull us through as they develop their own middle class consumers and shift towards greater domestic consumption. Furthermore, we suggested that the zero interest rate policies and Quantitative Easing 1, 2 and possibly 3 combined with Operation Twist 1 and 2 would all have the cumulative effect of devaluing the U.S. Dollar on the global market. The lower Dollar would make U.S. products cheaper on the open market and therefore, more appealing to the developing consumer class of the BRIC countries thus, boosting our exports and reviving our employment and Gross Domestic Product pictures. Unfortunately, it appears that the BRIC’s won’t be able to rescue us from a projected fourth quarter recession, which makes June’s stock market rally a great opportunity to hedge part of an equity portfolio and provide some protection ahead of a global economic downturn.

Many analysts have noted the weakness in the jobs recovery coming out of the last recession. Real incomes are actually lower than they were in ’09. Politicians may be beating the drum of the declining unemployment rate but the flip side is that we’re handing out more subsidies than ever and the budget deficit is continuing to increase. Bottom line, we’ve made no economic progress since approximately 2006 when the home refinancing boom really started to pump the asset markets full of cheap money.

The pendulum must swing both ways. There is a penalty to pay for years of excess spending. That penalty will be paid in forced thriftiness handed out by declining pensions, higher taxes, lower yields and declining equities. There is simply no way that economic promises made in the past can be kept in the future. Taxes can be measured many ways. Directly, through Uncle Sam or, indirectly through higher fuel, food and insurance costs. Yields on retirement portfolios will continue decline as the global race to devalue domestic currencies to spur export growth continues as evidenced by the European Central Bank cutting rates this week. Finally, the equity markets have not reverted to normal P/E ratios typical of a bear market bottom and are certainly not low enough to suggest the beginning of a new bull run.

The final nail in the coffin is the drawn out process of the Eurozone default, which has placed the world’s two largest economic blocks on the verge of recession/depression. This has caused the traditional BRIC economies, which are culturally based on savings to tighten their belts and prepare for the worst. This is the exact opposite approach that we took here in the U.S. post 9/11. The collapse in the equity markets spurred the Federal Reserve to pump the economy full of cheap money. This policy hasn’t changed since. Rather than allowing the U.S. to retrench and refocus on the importance of solvency, policy focused on putting smiles on the peoples’ faces after the crisis. Politicians love smiling voters and the money faucet continued to flow.

Protect yourself from the decline in the equity markets that the world’s economies and commercial traders are forecasting. The JP Morgan Global Purchasing Managers Index fell to its lowest level since 2009. This is based on more than 10,000 global businesses in more than 20 countries. Christine Lagarde, head of the International Monetary Fund is expected to cut their global growth expectations next week. Marc Faber of CNBC and Robert Wiedemer, author of, “Aftershock,” based on the post economic collapse as well as Dennis Gartman who specializes in commodity based raw materials all see a significant slowdown immediately ahead.

Finally, commercial traders in the stock index markets have been selling the June rally with reckless abandon. Their net position in the S&P 500 has declined by more than 17% in the last month. The move in the Nasdaq has been even more significant as commercial traders have trimmed their positions by more than half in just the last two weeks. The net result is that we must actively manage our own individual futures as the herd is taught to smile on its way to the packinghouse.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.


This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that

Commodity & Derivative Advisors believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

Leave a Reply