Stocks Can Also Fall, Apparently (The Cestrian Circle Newsletter)

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Analysis by Alex King, CEO, Cestrian Capital Research, Inc.

Stocks, as much discussed in our Inner Circle webinars and live chat, are going to get a correction. Stocks cannot go vertical, as has happened in the S&P500, the Nasdaq and the semiconductor sector, without pausing for at least sideways consolidation and, usually, a material drop. I think that when they do, it will be part of a longer journey upwards to new highs, but given the only-up nature of markets for some weeks now, it won’t feel like a short term correction, it will feel like Ye Ende Is Nigh. Or at least it will if you are unprepared.

A simple method for hedging the big index and sector ETFs is: wait for them to roll over and start to fall a little. Open a long position in an inverse ETF, unlevered if you like to sleep well at night, levered if you like a dopamine hit. Say $PSQ (unlevered) or $SQQQ (levered) for the Nasdaq. Place a sell-stop-limit order such that if the Nasdaq, in this case, makes a new all-time high, your hedge is sold such that you take only a small loss on the hedge but your long positions carry on upwards. So your downside is protected. But if markets do carry on falling, you have something in your portfolio that will be rising nicely. You can always move up your stop if the hedge keeps gaining in value, so that when the reversal to the upside comes - and remember, in all of history, the upside reversal has happened - you lock in some gains.

Righto. Let’s look at where markets stand heading towards the open today.