Daily Archives: March 7, 2013

Hedging The Dow At Its All-Time High

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The Dow Hits An All-Time High

With the Dow Jones Industrial Average hitting all-time highs recently (albeit, not in inflation-adjusted dollars), in this post, we'll look at the current costs of hedging the Dow component stocks against greater-than-20% drops. We'll also look at the optimal puts1 to hedge a position in the Dow-tracking ETF DIA against the same decline threshold.

Two Reasons To Track Hedging Costs

The first reason to pay attention to hedging costs is if you're considering hedging. But another reason is that we've seen some examples of stocks with high optimal hedging costs underperform those with lower optimal hedging costs. It will be interesting to revisit these Dow component stocks later this year and see if that pattern holds up.

Hedging Costs Of The Dow Components And DIA

The table below shows the costs, as of Tuesday's close, of hedging
each Dow component, and the Dow-tracking ETF (DIA), against
greater-than-20% declines over the next several months, using optimal puts.

Symbol

Name

Cost of Protection (as % of Position value)

AA

Alcoa Inc. Common Stock

3.11%***

AXP

American Express

1.72%***

BA

Boeing

1.30%*

BAC

Bank of America

3.20%*

CAT

Caterpillar

1.75%*

CSCO

Cisco Systems

2.50%*

CVX

Chevron

1.37%**

DD

E.I. du Pont de Nemours

1.71%***

DIS

Walt Disney

2.55%***

GE

General Electric

1.61%**

HD

Home Depot

1.04%*

HPQ

Hewlett-Packard

3.19%*

IBM

International Business Machines

1.12%***

INTC

Intel

2.14%***

JNJ

Johnson & Johnson

0.68%***

JPM

JP Morgan Chase

1.92%**

KO

Coca-Cola

0.65%*

MCD

McDonald's

0.65%**

MMM

3M

1.14%***

MRK

Merck

1.64%***

MSFT

Microsoft

1.83%***

PFE

Pfizer

1.03%**

PG

Procter & Gamble

1.17%***

T

AT&T

1.21%***

TRV

Travelers

1.80%***

UNH United HealthGroup, Inc. 2.10%**

UTX

United Technologies

1.17%*

VZ

Verizon Communications

1.11%***

WMT

Wal-Mart Stores

0.66%**

XOM

Exxon Mobil

1.25%***

DIA

SPDR Dow Jones Industrial Average ETF

0.64%**

*Based on optimal puts expiring in August

**Based on optimal puts expiring in September

***Based on optimal puts expiring in October.

The Optimal Puts To Hedge DIA

These were the optimal puts to hedge 1000 shares of DIA against a greater-than-20% drop as of Tuesday's close.

1Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor
uses an algorithm developed by a finance Ph.D to sort through and
analyze all of the available puts for your stocks and ETFs, scanning for
the optimal ones. The screen capture below from the latest build of the soon-to-come 2.0 version of the
Portfolio Armor iOS app.

Golden Fibonacci Ratio on EUR/USD (by Strawberry Blonde)

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I last wrote about the EUR/USD Forex pair on February 7th. At that time, price was trading around 1.3400.

Since then, price fell and has bounced somewhat…it's now 1.3095 (as of 11:29 am EST on Thursday) and is trading just above a confluence of two Golden Fibonacci Ratios (61.8%), which is near-term support at 1.3045, as shown on the Weekly chart below.

Price is trading in between the 50 sma (red) and 200 sma (pink). These moving averages are in a bearish "Death Cross" formation, and, as such, price is still under its bearish influence. A hold above 1.3045 could send it back up to retest its last swing high…a hold above that level could, finally, propel the EUR/USD higher to, eventually, reverse the moving averages to form a bullish "Golden Cross." This could take some time to play out, however, and we may see further range movement around both moving averages until then….otherwise, a drop and hold below the 50 sma could send price back down to retest the 50% Fibonacci retracement level at 1.2125, or lower.

 

In addition, and as a confirmation to any move on the EUR/USD, I'll be watching the European Financials ETF (EUFN). At the moment, it's in overall uptrend from its July 2012 lows, but has experienced a pullback from its February highs of this year, as shown on the Daily chart below. The Stochastics and RSI indicators have turned up and the MACD looks ready to cross to the upside, as well. A price break and hold above its 61.8% Fibonacci retracement level and 50 sma at 20.69 should produce that MACD crossover to, potentially, propel price higher. Otherwise, a drop below Fibonacci confluence at 19.32 could send price down to its 200 sma at 17.60/50ish, or lower.

 

Spot the Trend

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While somewhat painful (for bears, at least) to observe, the past four years have been, in some sectors, an easy-as-pie, buy-and-hold, any-first-grader-can-do-this bullfest. Look at the consumer staples ETF below. Place a ruler on your screen if you like. It just keeps going up. Steadily. Resolutely. Unfailingly.

I guess I was naive in underestimating how Americans love to buy crap and how they will never stop buying crap. Ever. Because it's what they are good at.

0307-xlp

Follow-Up on Zaky Post

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I received a lot of interesting email after my post about Andy Zaky, some of which included emails from actual clients/subscribers of his who had lost a ton of money (and I do mean a ton).

As a follow-up, here are some very interesting articles that have appeared in the past day or so that adds more color to the story; most of the new content was prompted by the same experience that I had – – that is, the real-life clients/subscribers writing in to the original author to tell their own stories.

Losses of Apple guru's clients could reach into the billions

Why analysts should not be investors

Apple: Learn From Andy Zaky's Mistake

0307-aapl

Either Way Day Again (by Springheel Jack)

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ES consolidated yesterday and overnight without delivering much in the way of retracement. Will it retrace more definitely today? Well the setup is there but these can get steamrollered by a strong trend upwards, and I think we are in one of those here. We shall see. The setup is there for a possible retracement into the 1525 area if the current high isn't broken with confidence:

 

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