Bull markets tend to last much longer than bear markets. The current bull market turned 8 years old on March 9th of 2017. The longest bull market since World War II occurred from 10/1990 – 03/2000. I remember this market very well. I had recently moved to UBS in Seattle as a financial adviser. My partner had just bought out his senior partner and he was looking for a “stock jock” like his old partner to help him manage his investment accounts. I was there for all of two months when I recognized that the bubble (internet) was real. I advised my partner to sell all of his high tech holdings and to move them to small banks stocks and natural resource companies. My recommendations went on deaf ears with my partner and most of our clients.

In retrospect, it is indeed difficult to get people to take profits in an atmosphere of euphoria and greed. The best hedging practices at that time were in the options market, which many people considered to be very speculative. They also had expiration dates and the time premiums made them more costly.

Today you can hedge against the markets by using the VIX, which is the CBOE Market Volatility Index. In August of 2015 (see the above chart) in the midst of a 7 year bull market the S & P 500 was selling at roughly 2100 and today it is just above 2400 (up about 14%). Over the period from August of 2015 to the present there has been three significant corrections. 

  • August 2015: 2400 to 1870
  • Feb 2016:      2080 to 1815
  • Jun 2016:      2100 to 2000

All of these corrections, within the bull market, were short in duration.

The CBOE Volatility Index is a key measure of market expectations of near term volatility conveyed by the S & P stock option index. The VIX was introduced back in 2006. In market declines volatility can rise quickly. If we look at the 2007 -2009 market decline the VIX moved from $10 to $90…not a bad hedge!

There were three minor spikes in 2016 where a hedge would have paid off:

  • June 2016 : The VIX went from $13 to $26
  • September 2016: The VIX went from $12 to $20
  • November 2016: The VIX went from $13 to $23
When we reach the final bubble stage for the markets, when the volatility of the VIX is low, you can find comfort in such a hedge. Granted it won’t be an easy decision, it’s hard to be a contrarian in a bull market. What I have found is that the risk is not all that great if you buy the VIX very low. For example, in August of last year you could have bought the VIX at around $11. Even if you didn’t sell on a rally and you still owned it today it would still sell just under $11. Obviously, you would need to have someone to consult with on this. If you  live in San Miguel de Allende and would like a free consultation just click here. Just something to think about………..      

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