By 12:52 PM the S&P had made a new high and the media signaled the January all-time high was finally broken. Overall though what does this new high mean to investors?
There have been quite a few “new highs” over the past several years and each time it has resulted in bears reappearing as soon as the new high drops back down. To be fair, many new highs are followed by market weakness as investors take profits. However the January high was followed by a typical bull market correction of 11% which brought out a lot of bears.
The market of January 2018 is not the market we have today. The market in January was over-extended, overbought and while earnings had been terrific, they were still not as good as the past two quarters since then. Today this market high is facing a slew of earnings that has stocks at lower price to earnings ratios on average and many stocks still well off the highs they made back in January or some in July. For my portfolio I am continuing to apply capital and stay invested as the market makes new highs.
Insurance When Trading The New Highs
To trade the new highs becomes a matter of watching the valuation levels and acting accordingly.
2800 is now a major support level for the market. It is not overly strong but it is significant. On August 15, the 2800 level was almost broken but instead sparked a new rally which has taken the S&P to the new highs we have today, just 5 days later.
A break of 2800 then would be a important event and an area to become more protective of positions. A couple of closes below 2800 would be a signal to buy some spy puts a couple of months out in time and out of the money as a form of insurance. It would also signal to reduce trade sizes and positions held. To help defray the cost of put insurance, I sell further out of the money puts to create a debit put spread. This greatly reduces the cost of setting up insurance.
Each successive level below 2800 advises me to add in additional layers of protection. For example, if the S&P continued to drop to 2700 and close below it, I again add in further spy put options a couple of months out and close out the first set of puts bought when the S&P broke through 2800. I also reduce still further the number of positions I am holding in equities and decrease the size of trades still being done.
If the S&P moved down to 2600 it means another repeat of the same strategy. This is namely buying more spy puts and closing the second set of spy put trades from when the 2700 level was broken. I also reduce still further equity positions held and the size of trades still being done.
In this way I can continue today to generate income and profit in my investing despite the market being at new all-time highs because I know in advance, I have a plan in place to assist in the event that a second top is actually being made at present rather than the start of another leg higher in this long bull market. There is no analyst who can advise perfectly whether the market will advance higher in a new move up or muddle along and essentially start a move lower later in the fall. But because I have a plan in place to handle either scenario – up or down, I can continue to stay invested at present.
One last point to remember is that bear markets start before analysts or investors are aware of them and they end before analysts or investors know the worst is over. While it is true that this present bull market is now the longest in history, that does not mean it is over. It just means a new record has been made which someday another bull market will break.
All my best for your continued investing success,
Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk.
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