Wow what a roller coaster ride the last few days! From last week Friday to close today, U.S. markets fell off rails nearly 2.7% in 3 days and over 3.5% from the February 25th all-time high.

Image courtesy thetaxhaven: http://www.flickr.com/photos/83532250@N06/

Don't panic. Protective puts are a great way to lock in profits in uncertain times

The move is being felt around the globe as market participants attempt to digest and position themselves in the face of the Fed and a stronger dollar. Every news feed on my desktop along with many analyst appearing on TV talked about concerns surrounding energy and the strength in the U.S. dollar putting pressure on equities.

Historically the dollar (UUP, quote) has been strong and equites continue to move higher. So why are we seeing triple digit moves in the DJI? I believe it’s the speed in which the dollar rocket higher that has sent fear into the market so rapid. Remember we just had years of unprecedented QE and Fed holding the market’s hand and no one really knows how all this will play out.

Add the fact that the DXY is nearing 99 level in today’s surge (DXY is +9%YTD) on mixed economic data, concerns about Fed raising interest rates as soon as June and China’s demand for oil is dropping off.

The markets are now facing the “perfect storm” right now:

  • Federal Reserve unknowns surrounding rate hikes
  • Historical low rates since 2008
  • ECB is in full swing easing, euro at 12 year low
  • China’s demand slowing
  • Physiological fear building on all sides
  • Mixed economic data

Overall my concern for the dollar is growing, especially since we broke below the 1.06 level in EUR/USD which now has a very good chance of hitting parity. If EUR/USD remains below the 1.07 level come tomorrow’s U.S. open I want to be looking at putting a short position in FXE (FXE, quote) by buying PUTs. I’m long U.S dollar against Yen and against the Peso in the FOREX market. Using options limits the risk in dollar exposure while allowing the position to benefit fully in euro’s weakness.

As Tim mention on his audio call earlier today “we are in a mood of caution”. Each name in your portfolio needs to analyzed and some may need to be cut while other may be able ride out the storm. Utilities for example are likely in for additional pain yields moving in anticipation of a Fed move, however other high yielding dividend plays may fair better.

It goes without saying (but I’m going to say it anyway) pretty much any name in the oil patch will continue to be under pressure. It doesn’t appear the drillers are likely to drastically slow production anytime soon to match drop in demand.

And of course with any huge shift in markets those pesty margin desk will force some to use their winners as ATM machines. So if you are in names like Apple or Google there will likely be a chance to get back in a lower price. Do be sure to tune into Tim’s audio call as he tells subscribers how to hedge and which market NOT to shy away from.

 

 

 

 

Tagged with:
 

Leave a Reply