Hedge Now For The Unexpected

August 23, 2000
Kevin Haggerty

Most of what I read
indicated that consumer spending, which is most heavily weighted in GDP, slowed
substantially in the second quarter, and Greenspan is okay if wages nudge up a
bit, but productivity continues. All of this seems to be convincing the pundits
that we will have the perfect soft landing, and it will all go away as we
continue on to lofty heights in the market.

I’ve heard that many times
before over the years, and it has never played out that way. I say that now is
the time to hedge long-term positions and/or put on bear strategies in the
S&P 500 with a defined risk to cover the September/October period. The
S&P implied volatility over the past two years has ranged from a high of 46%
down to 16%-17% and is currently at the low end. For those of you experienced in
options, you could also put a delta-neutral trade on, combining futures and
options on the futures to take advantage of any explosion in volatility combined
with directional movement either way.Â

If you are not educated in
the various options strategies, then you should decide what you will do in any
significant meltdown if we get a nasty Fall selloff. One of my readers tells me
that speculation in its truest sense calls for anticipation, and that means have
a plan for the unexpected when you enter a potentially dangerous period.Â

The no-surprise FOMC didn’t
prevent the gymnastics in the S&P 500 futures, as the games began. At
2:15 p.m., after the announcement, the S&Ps dropped 3.8 points immediately,
and at the 2:20 p.m. bar, they jumped 7.3 points to a new intraday high of 1515.
By the 2:35 p.m. bar, they declined 8.5 points to 1506.50 and also below the
260-period EMA on the five-minute charts. Then, like magic, they advanced 6
points to 1512.50 on the 3:15 p.m. bar and at 3:30 p.m. there were three
wide-range-bar knives down to new intraday lows at 1503, which was -9.5 points.
This was a travel range of over 35 points from the 2:15 p.m. FOMC no-surprise
announcement.

Before I forget, the spread
from high to low on the September futures was only 12 points. That’s what goes
on day in and day out in the futures and many of the high-momentum stocks such
as ARBA and JNPR, in addition to the artificial manipulation in the S&Ps due
to program strategies and various other reasons. This all creates opportunity
for the short-term trader.Â

The standard rhetoric
coming into Labor Day is “slow, and slower.” That may happen, but let
me remind you of last year in case any of you traders are leaving early this
year. Last year, the five days
preceding the September 6 holiday in the Dow Jones went: -176 points, -85
points, +109 points, -95 points and +235 points on the Friday before the
holiday. The Dow closed at 11,078. The average volume for the week was 705
million. It is significant to note
the Nasdaq closed at 2843. We’ve come a long way. And also the S&P 500
closed at 1358.

face=”arial, helvetica”>(September Futures)
Fair Value	size=2>Buy	size=2>Sell
6.00	7.20	4.80

Pattern
Setups

Right now the futures are off almost 5
points and after the move that we’ve had, be prepared to take any kind of short
action in any of these air-pocket shorts where the momentum stocks break below
the 20-, 60- and 260-period EMAs, and also be ready to capitalize on the QQQs
below yesterday’s lows.

Have a good trading day.

src=”https://tradingmarkets.com/media/images/comms/haggerty/kh082300-01.gif” width=454>

src=”https://tradingmarkets.com/media/images/comms/haggerty/kh082300-02.gif” width=453>

Hedge Now For The Unexpected

BUY THE FEAR, SELL THE GREED

Quick Links

Company Info

Contact

Company Resources