Some Market Hedges To Always Consider For A Well-Balanced Portfolio

by: Brian Gorban

In these volatile times, it's always wise to have some market hedges as even though we feel we will be 100% right, myself included, on each and every investment, the harsh reality is that is far from the truth. Therefore, it is wise to explore some market hedging strategies that can help us make money in any direction the market chooses to go:

1. The vast majority of the general market are long stocks and with good reason as over the long-term, the stock market has proven itself to be a great generator of wealth. However, there have been long periods of time when the market hasn't gone up or even lower as we're actually experiencing now with the S&P 500 down approximately 15% over the last five and ten years respectively meaning that people would've been better off just putting money under their mattress. However, we all know that over the time, the hidden tax of inflation will erode that investment as the purchasing power of $1 since the creation of the Federal Reserve is now only worth $.02, a full 98% decline. So, why not look at the ProShares UltraShort S&P 500 (NYSEARCA:SDS) which seeks to correspond to twice the inverse of the S&P 500's daily performance. That means if the S&P 500 was down 1% this should be up 2%, as was the case today, providing some return when the general portfolio is lower. For the more aggressive investors, there's the Direxion Daily Small Cap Bear 3x shares (NYSEARCA:TZA), which seeks daily investment results the 300% the inverse of the broad-based Russell 2000. As was the case today, the Russell 2000 was down 2%, while TZA jumped almost 6%. I personally have no position or plan on getting one into these positions as they're too hard for me to value, however many use these as a hedge against their long positions and think it's worth your consideration.

2. Gold, through the ETF ticker GLD, is seen as one of the best holdings when financial fears arise in the market as it's been used as a currency for over 5,000 years. Therefore, when there's general fear that the Euro will soon cease to exist or the continual debasement of the U.S. dollar, gold is the big beneficiary as we've seen just this past decade it rise from approximately $250/oz. to its current almost $1900/oz. price. Silver, through the ETF ticker SLV, is less used as a safe-haven commodity, even though it's been used as currency much the same time as gold, since it's largely used as an industrial metal and therefore tied to economic growth. However, that has had a tremendous rise as well rising from approximately $3/oz. a decade ago to its current $42/oz. Crude oil, through the ETF ticker USO, along with agricultural commodities through the ETF ticker DBA, are also tied to economic growth, but still have shown some strength in the face of economic worries as currencies world-wide are continuing to be debased. Commodities are largely traded on technical analysis as typical valuation metrics of earnings yield, dividend yield, price/book value, etc. don't apply to these. From what I see, these have all gotten a little ahead of themselves in the short-run, but in the long-run I like them strongly as the Federal Reserve is committed to continue the devaluing of the U.S. dollar and therefore lead to inflation where these products very likely rise in value. I like buying these at strong support levels which I see with GLD at $170/share, SLV at $38/share, USO at $32/share, and DBA at $31.50.

3. Finally, a common way is to go long your favorite stock in the sector and go short the corresponding stock you find weakest or the general index. For example, if you go long JP Morgan Chase (NYSE:JPM) and feel Bank of America (NYSE:BAC) is the weakest of the financials, then one can either short or buy puts on Bank of America to weed out the financial sector risk. Moreover, one can simply buy the ProShares UltraShort Financial (NYSEARCA:SKF) or 3x UltraShort (NYSEARCA:FAZ) which correspond to the inverse of 200% and 300% respectively of the general financial indexes. The logic here is that while JP Morgan is the strongest of the bunch, generally stocks move as a group and so in this case it will go down the least while your investment in SKF or FAZ will help hedge that loss.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLD, SLV, USO, DBA over the next 72 hours.