Insight & action

Time to Insure Against a Stock Market Pullback?

Our Monday morning coffee was interrupted by two nearly identical warnings from two highly respected technical strategists.

Chris Verrone of Strategas Research Partners and Carter Worth of Stern Agee advise their institutional clients to heed waning momentum, especially as stocks hover near all-time highs. They cite multiple indicators like breadth, price action and the relatively few number of stocks in the S&P 500 Index currently at their respective 20-day highs (just 17 percent).

We overlaid Chris's momentum data on a chart of the S&P 500 Index to illustrate their point.

Mr. Worth has been writing about this divergence for several months. Like Chris, he favors a "bottoms up" approach. He considers individual stocks and separate sectors to assess overall market conditions, rather than simply looking at the amalgamated whole. He thinks more investors should do the same.

Carter cites flagging momentum across a number of global indices including the S&P 500, S&P MidCap 400, S&P Smallcap 600, NASDAQ, Nikkei-225, Shanghai Composite and Euro STOXX 600.

While we are not ready to sell stocks across-the-board -- there's still plenty of global support from central banks -- we think insuring against a potential pullback makes sense. So we are buying an at-the-money put on the S&P 500 Index with a 30-day maturity. Specifically, we're looking at the 187 strike put which expires June 6, 2014. It costs $2.54, which equates to 1.4 percent. This is a premium we're happy to pay in order to sleep more soundly.

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