Two weeks ago, I explained that the stock market experiences higher average returns coming out of a shorter rest than a longer rest. I specifically looked at the S&P 500. After a 22-day breather, the average 2-month returns were 1.84%. After a 110-day breather, they were a much lower 1.16%.
Considering the market has spent even more than 110 trading days moving sideways, I recommended Cycle 9 Alert readers pick up some “correction protection.” In simpler terms, I mean insurance.
The great thing about insurance is it takes a lot of risk off the table. The not so great thing about it — we never know until after the fact whether or not we actually needed it!
While I’m following the bulls, because they’re still leading the dominant trend in the market, that doesn’t mean I don’t see the risks ahead. And just because we haven’t needed insurance so far, doesn’t mean we won’t need it in the near future.
This is important because volatility spikes are fairly common in the summer months of June, July, and August. The average spike during these months is around 63%. The particular correction protection I’ve selected for Cycle 9 readers will pay out once volatility spikes by 30% or more from current levels.
Here’s a glance at volatility going back to 2004. The black horizontal line represents the threshold for a 30% spike, and the black dots show when the spike occurred in June, July or August.
We’ve seen volatility spikes of 30% or more in eight out of 11 summers, since 2004. Which means it’s quite likely the insurance Cycle 9 Alert readers bought will pay off.
Still, insurance is more than about protecting against losses — it also means you can continue to play the dominant trend, which, as I mentioned, is still bullish.
I recommended Cycle 9 readers make a bullish play that has accrued gains of 85% and 120% over the last three months. We’ll ride this bullish trend for as long as it lasts. And considering Cycle 9 readers operate on a short-term basis anyway, and have insurance to back them up, we’ll continue to profit with peace of mind.
You can join this select group of readers here. Wherever you choose to invest, take measures to protect your portfolio this summer.
Adam O’Dell, CMT
Chief Investment Strategist, Dent Research
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