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CATEGORY Trading

How to Hedge Against a Market Correction at All Times



February 12, 2018

With recent market swings in both directions, there are four key pointers to follow.

Tip No. 1 -- Don’t panic.

If you panic, you sell. And if you sell, you miss the potential for the recovery rally. We have to remember that economists are still bullish on U.S. economic growth going forward.

Tip No. 2 – Consider buying the dip.

Wait to see where the market begins to show signs of catching support and recovering. Also, be sure to wait for signs of a higher move to avoid buying into head fakes. We also have to remember that the U.S. economy is still strong. GDP growth, unemployment, consumer spending, and tax reform could fuel higher highs.

Tip No. 3 – Do nothing and wait for the storm to blow over.

It may take some time for investors and traders to feel confident in buying again. If you’re most comfortable waiting for the possibility of a resumed rally, do so. It’s your money. Take your time. But remember, markets are resilient and can snap back quickly, too.

Tip No. 4 -- Always be hedged for the "what if?"

In early February 2018, the Dow Jones plummeted 1,000 points. On top of that, analysts began to argue we could see a 10% correction, or a drop of 2,500 points, which should scare you. What should also scare you is if your portfolio isn’t hedged against the possibility of such a decline.

In fact, to be very honest with you, it’d be downright stupid not to protect your portfolio here.

Granted, no one can time a potential correction. But we still prepare for it just in case.

We also have to remember that bull markets are born in pessimism and end in euphoria, just as we saw in 1929 and 2008. We must also remember that when analysts get far too bullish as they just were, it happens near market tops, not near market bottoms.

Consider that the next time you leave your portfolio unprotected.

Some of the best ways to hedge for market downside at any time is with these four opportunities.

  • 1 – Consider moving some of your portfolio into cash
  • 2 – Trade the potential for Volatility by buying Volatility Index (VIX) calls
  • 3 –Buy a put option on the NASDAQ, the DIA or even the SPY
  • 4 -- We can even hedge our long positions with ETFs, as well, including the Pro Shares Short S&P 500 ETF (SH), the Pro Shares Ultra Short S&P 500 (SDS) and even the Pro Shares Short Russell 2000 (RWM).

It’s never safe to leave your money unprotected without a hedge.


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