Wednesday, August 3, 2011

Hedges Are Making a Difference

There’s no point in sugarcoating it – the market has taken a pretty good beating over the past couple of weeks. The S&P 500 is off by about -7% since its most recent high on July 7th, and yesterday was just plain ugly as the selling intensity picked up throughout the day and ended with a -2.5% loss.

Today, stocks opened with even more selling – dipping all the way down to 1234 and in the process blowing right through what seemed like pretty good technical support at both the March and June lows around 1250 on the S&P. But, stocks staged an impressive turnaround and actually managed to close higher on the day, so perhaps a bounce is finally developing after 8 straight days of selling.

With investor angst reaching feverish-pitch levels on the heels of the debt ceiling drama and the latest market decline, there is actually some good news in all of this. Many of the portfolio hedges that we currently own for exactly this type of volatility are working as expected – gold continues to make a new record high almost daily, and Treasury bonds have rallied like crazy the past several days.

So, we’ve been able to dampen the blow from the equity markets somewhat. But we’re not just remaining complacent, either. Recent economic data and market action has been increasingly poor, and if this continues for much longer, we may need to take additional defensive measures in portfolios.

Chart: S&P 500 (black), 20+ Year Treasury ETF (brown), Gold ETF (blue)