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Focus Article – Hedging Our Long Portfolio

  • March 26, 2012

With the new bull market in full swing, I have been getting questions from seasoned investors about insider activity and if it points to a potential drop. We have been calculating an insider sell/buy ratio on a weekly basis for close to two years and it is indeed trending higher. There was a noticeable spike two weeks ago when the insider sell/buy ratio hit a high of 52.9 (indicating insiders sold 53 times as much stock as they purchased) and this was the highest the ratio has been since last October. The insider sell/buy ratio is just one indicator and cannot be relied on in isolation. Another indicator that I personally tend to follow is the Volatility Index (VIX), which is also known as the fear index. The VIX hit a low of 14.82, the lowest it has been since last May as you can see from the chart below. Incidentally, April 29th marked the high of the market for 2011 and the market started declining in June before plunging sharply last August.

Market forecasters look at a number of different indicators and oddly enough still tend to get the direction of the market wrong. Such are the perils faced by forecasters and soothsayers with crystal balls. However, if the recent bullish move in stocks or either of the two indicators discussed above give you pause, you could hedge your long portfolio through various strategies. We discussed several hedging strategies last June in a special report titled Hedging Against A Sharp Decline Using Put Backspreads and the timing of that report couldn’t have been better given the sharp drop last summer. I believe this bull market still has a lot of room to run but have also started taking steps to hedge against a pull back or an unexpected event that could bring this party to a premature end. Specifically I have started taking profits and increasing the cash position in my long-term portfolio, I have started selling covered calls on positions that have appreciated, I have initiated put back spreads on a couple of companies (Green Mountain Coffee Roasters and Crown Castle International) and am planning on going long the VIX.

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