Identifying Short-Term Tops & Smart Hedging Strategies

Welcome to this week's edition of our newsletter, where we explore vital insights to help you navigate the market with confidence. Today, we delve into the art of identifying potential short-term tops and share effective strategies to hedge your investments during uncertain times.

Historically Cheap Put Option Hedges:

We are excited to reveal that this week presents a unique opportunity for hedging your portfolio! Buying put options to protect your investments has dropped to historically cheap levels last week, offering a cost-effective way to mitigate risks and safeguard your hard-earned gains. If you are unfamiliar with using put options as a hedge, we have made a video walking you through the ins and outs of leveraging put options to secure your investments against potential downturns. Here is the link to the video https://youtu.be/zuqTgtushoU

Signals to Identify Short-Term Tops:

Biotech - A Risk-On Sector:

Biotech is widely considered one of the most risk-on sectors in the market. Spotting a trend shift and observing the XBI declining while the S&P (SPX) is rising could provide valuable insights into the market leaning risk-off.

Consumer Discretionary vs. Consumer Staples:

On the other hand, Consumer Staples are known for being more defensive. A downturn in the XLY/XLP chart suggests Consumer Staples are outperforming Consumer Discretionary, indicating investors may be retreating to safety and adopting a risk-off approach.

Take a look at the chart below and notice how XBI (blue) and XLY/XLP (white) started going lower before SPX (orange), and shortly afterwards we saw a pullback begin in the S&P. Consider hedging with protective put options or inverse ETFs to shield your portfolio from potential downturns in the biotech sector. If the XLY/XLP chart demonstrates a downturn, suggesting Consumer Staples outperforming Consumer Discretionary, consider hedging your consumer-focused investments using defensive options or sector-specific inverse ETFs.

Percentage of Stocks Above the 50 and 200 SMA:

The percentage of stocks trading above their 50 and 200 Simple Moving Averages (SMA) in the S&P 500 is another vital signal to watch closely. When you observe 90% or more of stocks trading above their 50 or 200 SMA (Simple Moving Average), it may signal frothy market conditions, and a potential need for mean reversion. This valuable insight can help you take timely actions to safeguard your investments in changing market environments. Take a look at the chart below to notice how we recently met these conditions on the percentage of stocks in the S&P above their 50 SMA and the market has started pulling back. When you notice an overwhelming majority of stocks trading above their 50 and 200 SMAs, indicating frothy market conditions, it might be an opportune time to implement bearish hedges. Utilize put options or inverse ETFs to protect your portfolio from potential mean reversion and market pullbacks.

The SKEW Indicator - An Overview:

SKEW is an essential metric designed to gauge the probability of tail-risk events, such as extreme market downturns, beyond two standard deviations from the norm. When SKEW rises, it signals a higher expectation of market turbulence, indicating a potential pullback in the S&P 500. As astute investors, it is vital to utilize SKEW to your advantage. When SKEW reaches elevated levels, consider hedging your long positions with protective put options or other bearish instruments. These hedges can act as a safeguard against potential market downturns, providing a safety net for your portfolio. Take a look at the chart below to see a demonstration of the relationship between SKEW and the S&P.

Our Insights - Your Success:

At Investment Intelligence, our mission is to empower you with actionable insights and strategies to excel in the ever-evolving market landscape. We believe that understanding when and how to identify short-term tops, along with implementing smart hedging techniques, is crucial to building a resilient and profitable investment portfolio. Today’s subject was covered in a video recently and if you’d like you can watch that video by clicking this link here https://youtu.be/UyNsVi7Rcyc

Stay Tuned - Expert Analysis & More:

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Thank you for being a valued member of our community. We look forward to guiding you on your journey to financial success!

Best regards,

Zachly Trades

Investment Intelligence

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