VIDEO: Why We Added More Protection With a Market Hedge

In today’s Daily Rundown video, Chris Versace goes into greater detail about the Portfolio’s decision to initiate a position in the shares of the ProShares S&P 500 Short ETF SH. For newer members, he explains the mechanics behind SH shares and why that makes them useful as a market hedge. 

"We are not expecting to be long-term holders of SH shares," he adds. "It's another buffer on top of our cash position."

Plus, with a few Portfolio positions having moved past our price targets or approaching them, Chris shares which ones could be lifted higher. 

Transcript

CHRIS VERSACE: Hey, folks, Chris Versace here. It is Thursday, October 10. If you're taking a look at the stock market, you're seeing most of the major averages trade a little bit lower this morning. That's in response to the warmer than expected September CPI report. If you saw our alert, then you know that all of the four key metrics that folks track, that's the headline CPI, the core CPI, as well as the year-over-year and sequential comparisons for both, were ahead of the market's expectation. We also saw core CPI actually tick higher. So moving in the wrong direction. We were thinking that would be the case, given some of the indications we had from other September data. And it kind of led us to take a cautious path heading into the report.

We also have tomorrow the September PPI report. And if you remember my comment about the ISM September Services PMI and its price component spiking, jumping back to levels that we have not seen since January, we could very well see another warmer than expected print in the September PPI report. As that happens, when we take the totality of the recent data, again, some of the services PMI data, the September employment report, stronger wage gains and job creation and the upward revision for the Atlanta Fed's rolling GDP forecast, better known as GDP Now, which now sits at around 3.2% for the current quarter, that's a lot that says the Fed can slow walk its way towards further rate cuts.

My thinking is that the market is going to have to start to really rethink the prospect of that. It has gone from 3 to 2. It could very well have to go to 1, possibly none, based on incremental data. And that's what we will do. We'll continue to follow the data. We're not going to be dismissive like the Fed's Austan Goolsbee, who's saying he's looking past certain things. I think that's a mistake. Remember, listening to the data and letting it talk to us is how we stay on path with our thinking. So we will continue, as I like to say, to listen to the data.

Now, while the market might have to rethink this even further, we also shared with you on one of our Alerts today that the S&P 500 is bumping up against PE valuation levels that are even more stretched than they were previously. And in the Alert, we detail in the past when we've seen the S&P 500 PE multiple move even higher than it is today. But the circumstances are extremely different today compared to those three instances. And I would suggest if you haven't read the Alert, please do.

I think you'll find it quite helpful, quite informative. In that Alert, because of this potential rethink, because the market is stretched, and we have some concerns about the September quarter earnings season, just given the election uncertainty, given what we're seeing happen again, I should say, in Florida with the hurricane damage, it's reason to think that the September quarter earnings season may not be all that everyone is expecting. In fact, I would argue that given where the market has been, it has to be exceptional.

Call it pristine, right? It has to be better than expected for the earnings and the outlook has to be solid or better than solid as well. And just given the backdrop of everything else that's going on, there is the risk that may not be the case. So for that reason, we added shares of the ProShares short S&P 500 ETF, ticker symbol, SH. Now, a few things about this.

This is a tactical move, because there is risk that the market trades lower as we go through the September quarter earnings season and these things that we've been talking about come into play. We are not expecting to be long-term holders of SH shares. It is, again, a tactical move. That's why there's no price target. That's why there's no rating.

If we do see the market pull back to key support levels, the 50-day moving average, maybe the 100-day moving average, depending on what we're seeing, that would be a reason for us to consider exiting the position in SH. Again, it's a tactical, short-term position designed to protect the gains that we've amassed and help insulate the portfolio should we see the market pull back. In other words, it's another buffer on top of our cash position.

Now, what is the SH shares? Well, they're an inverse ETF, which means that they're closely correlated in a negative way to the S&P 500. So if the S&P 500 goes higher, SH shares should move lower. If the S&P 500 goes lower, we should see a positive return in SH shares. That's why we're using it for what it's designed for to help hedge your investment portfolio.

I imagine that we might have some other questions about SH. We do have office hours today, so I would invite you to be there. But we also have office hours again next week, Tuesdays and Thursdays. So to the extent that folks have questions, comments, please use the form. I'm happy to entertain them.

But that's kind of what we've done today. But I also want to touch on one or two other things, including Costco. Man, oh, man, those were some incredibly strong numbers both for US Comp sales and e-commerce numbers. We had said that we would potentially revise our Costco price target after the company reported its September quarter results if we saw further strong monthly revenue numbers. So we are going to take a look at our Costco price target, but we're also going to take a look at some other price targets as well.

ServiceNow, let's move past our $900 price target. We are seeing signs of faster, or I should say, accelerating, adoption of AI in the enterprise. Remember, with ServiceNow, AI gives them some very nice price lifts. So we'll be taking a look at the ServiceNow price target. Mastercard is another one, especially coming off of the September employment report.

And you've probably noticed, too, that our shares of cyber, better known as the First Trust NASDAQ Cyber Security ETF, have moved higher and they're starting to bump up against our $62 price target. So that's another one that we're going to take a hard look at. I do think there, just given the continued growth in cyber attacks, as well as what we're starting to see with AI-enabled cyber attacks, that we do have some upside in cyber shares to go. So we'll be looking to revisit that price target.

And on top of all of that, remember too, that today AMD has their big AI event. So we'll be watching that as well. And that, my friends, is today's video. So thank you for watching. Please be sure to check your emails, check your Alerts. We want to make sure you're getting our latest thoughts. And if we make any moves with the portfolio, either bringing something into the bullpen, if we're adding something to the portfolio, or maybe as we did earlier this week, taking advantage of some pronounced moves to lock in some gains, we want to make sure that you are right there with us. See you soon, folks.

At the time of publication, TheStreet Pro Portfolio was long SH.