Why It’s Essential to Always Hedge for Volatility

In late November 2018, the Dow Jones skyrocketed 617 points in a day. The NASDAQ gained 204. The S&P 500 was up 61 points. All thanks to easing trade war concerns and bullish commentary from the Federal Reserve. 

Investors and traders piled back into the markets, thinking all was well.

Then… KAPOW!

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Just a few short days later, the Dow Jones plummeted 800 points. The NASDAQ fell 283. The S&P 500 dropped 90 points on the day. All as investors quickly realized the U.S. and China trade war is far from over. The tariffs already put in place still remain.

And should both sides fail to reach a compromise within 90-days, new tariffs could be implemented. Yes, there is a halt in tariffs,” said Delores Rubin, equities trader at Deutsche Bank Wealth Management, as quoted by Bloomberg. But “we haven’t resolved anything yet.”

It didn’t help that Larry Kudlow noted that if a deal with China is not reached within 90 days, the trade war will again escalate.

In fact, he noted the U.S. would increase tariffs to 25% in that event.

However, it wasn’t just the trade war news that buckled the markets.

Apple supplier, Cirrus Logic cut its earnings forecast for the holiday quarter.

The company cited “recent weakness in the smartphone maker” in reducing sales to a new range of $300 million to $340 million. That’s down from the $360 million to $400 million forecast in early November 2018. It’s now also below analyst forecasts for $367 million. 

Even Apple supplier, Broadcom adjusted its earnings forecast last week.

The housing sector took a hit, too after Toll Brothers posted earnings that are signaling softer fundamentals, too. In fact, it just reported its first fall in quarterly orders in more than four years thanks to rising interest rates and higher home prices.

According to CNBC:

“The housing market has been a weak spot in a robust U.S. economy, with economists blaming the sluggish trend on rising mortgage rates, which have combined with higher prices, to make home purchase unaffordable for potential buyers. Sales of new U.S. single-family homes plunged to a more than 2-1/2-year low in October due to sharp declines across regions”

There may be a lot to be excited about with a potential resolution to a trade war. But as we all know, nothing is a guarantee.

To be safe, to protect your portfolio from the potential for excessive volatility, it’s safe to be protected with volatility trades, including:

  • Velocity Shares Daily 2x VIX Short-Term ETN (TVIX)
  • iPath S&P 500 VIX Short-Term Futures (VXX)
  • ProShares Ultra VIX Short-Term Futures (UVXY)

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