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NEW!!
PITBULL INVESTOR STRUCTURED HEDGE GENERATOR
CLICK HERE FOR WORKING HEDGER DEMO DURING THIS TRIAL PERIOD
A shifting stock market has given us some tentative buy
signals for the adventurous, but must be traded with caution and I am
recommending hedges. Up until now there has been no effective way for the
individual to put on the same type of protective positions as the large
hedge funds because the cost of insurance was too high. Typically they use
9% margin to protect themselves during times of indecision.
With the advent of new trading vehicles we now have the opportunity to
protect our positions for somewhere between 9%-11% and this is not a cost,
but rather collateral and you will get the majority of that back.
Typically the maximum cost for hedging your bets should fall in the range
of about 1.2% of your total portfolio.
But first to the signals.
As you know, I have been teaching my mentoring students to use the Market
Health charts I created to tell us when it is safe to get back in the
water. These colorful histograms use very simple rules. If the current
range is blue, you can buy with impunity. If the current area turns orange
then it is time to limit new positions and look for safety.
The charts below are expansions on those charts which now give you another
alternative which is to add hedging to allow you to get into trends
earlier.
Here is the NYSE indicator which can be used with DOW, NYA or SP500
stocks:
Notice that I have now added vertical buy and sell lines that can be used
by "early adopters" to get into the markets by using hedges for
protection. The actual construction of the timing signals will be reserved
for my mentoring students as I want to protect this indicator from rapidly
being disseminated to other market timers as has happened before.
The way it works is that you will put on protective hedges as the markets
begin to turn up and at the top of trends when they begin to turn down so
as to give support at the most vulnerable times. This also allows you an
automatic "short play" once we enter into the orange areas by
simply selling your major trend positions which are now failing and
allowing the hedge to make substantial money in falling markets at a
fraction of the investment cost.
Right now you can see that we had a "Green Line" signal to buy
last night. We are still in a high risk area, so you must buy with
prudence, but we ARE getting our first signals in months from our
EarningsTrader, TradeSniffer and Pitbull Weekly trading systems. We are
also due for a post-election pullback which should offer the best
opportunity for longer term buying positions.
For more risk-adverse traders who don't want to use hedging you should
wait until we move firmly into the "blue" buy zones again.
Here is the NDX TECH 100 stocks
Notice that it also gave our proprietary "Buy With Hedge" signal
last night. meaning that we can now look for Tech specific areas for
investment.
Now, how do we construct the hedge? Normally this would be a time
consuming and difficult and complicated effort. The snapshot below shows
you how easy it can be using a new tool that will be available to existing
RoundTable or Lifetime Pitbulls.
Here is a snapshot of the Online Hedge Generator which will be
available for you to play with.
I have already filled in some values so you can get the idea.
First I entered the total value of our portfolio including cash in the top
yellow entry box.
I then entered $15,000 in the Broad Market-SP500 category which is the
aggregate amount we have invested in those stocks. (we aren't clairvoyant,
so you have to do some of the work), and then also put in $25k for
technology specific investments. I also put in $40,000 for Oil & Gas
even though I am actually short in energy at this point in time.
Down below in the area where the hedge is generated We have 5 drop down
boxes which you can use to select whether you are BUYING (long) or SELLING
(short) for each of the categories you have investments in. In this
example we have selected "Buying" for the SP500 and Technology,
and "Selling" for those Energy Shorts I had above.
The hedge generator then automatically tells you what you need to buy to
hedge each of those selected categories. As an example, to hedge the SP500
trade you would buy 2 contracts of the SSHCX calls on the SDS double index
ultrashort proshares at an approximate price of $10.15 for a total
collateral of $1015.
For the 25K we have invested in Tech Sector we would buy calls on the QID
double short index with the DYMDA for a total outlay of $1890.
For that Oil Short we have going, we offset that by buying 3 calls on the
DUG double long index proshares for a collateral outlay of $2145.
We have now created an offsetting hedge with 5.2% of our total capital as
collateral.
That does not mean that we are going to lose 5.2% if we see all of our
investments move in the direction we hope for, because at some point we
will take our hedges off, when conditions merit and we will sell the calls
back and get a return of premium and remaining value. Typically the actual
cost of protection if all of our major trends prove correct is only about
1.2% and if we are making money that gets lost in the noise for an
opportunity to get in early or stay in a trade during dangerous times.
WHAT ABOUT THOSE OF YOU WITH RESTRICTED INVESTMENT RETIREMENT PLANS?
Now, that is all well and good, but how do folks who are locked into company retirement programs which restrict their investments and don't allow the use of options protect themselves? During the last 8 months your typical Mutual Fund "Safe Money" saw a loss of 10 years of growth and your accounts are probably down about 40% from where they were in November. Mutual funds offer no cover and there is no way to use a hedge against that kind of withering decline, (or is there?).
Mutual funds continue to promulgate the specious argument that you are investing for the next 5, 10 or 15 years, so don't sweat the bubbles and hiccoughs. Well, if you are my age 15 years has come and gone and if I had stayed in a mutual fund I would have 40% less to retire on this year.
But..But you say...I have to stay in my mutual fund retirement account for tax reasons or because my employer doesn't have any other options besides 5 Fidelity funds or whatever the mix may be.
Very simply, by opening an options account and funding it with 8% cash OUTSIDE of your total Mutual Fund retirement account gives you all you need to effectively set up a hedge against those issues within your retirement plan. Simple, yet effective protection in a market that offers you no other cover.
In the future I will be adding other specific sectors according to the chart below which shows you what vehicles are currently available for which trading directions. Some of these Proshares do not have sufficient volume or options yet, but as they qualify I will add them to the calculator to improve the accuracy of the hedges.
The calculator is available online for everyone for a short time to play with at
CLICK HERE FOR HEDGER DEMO
After that trial period it will be available to existing Pitbull Investor customers for the duration of your subscriptions and to Mentoring Students or Lifetime Members. If you renew your RoundTable before the end of this month, the added time will be added to your subscription and you will have access until that expires.
At the end of this month this will become a separate paid service.
Enjoy and let me have your feedback.
Henry
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