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How to Hedge Your Stock Portfolio With Bond ETFs

Hey There Income Hunters,


I’m sure there were more than a few of you taking a breath at the close today.


The NASDAQ-100 Index (Ticker: NDX) hit 13,725 at lunchtime, which put it more than 18% off the day’s high. 


That’s a whisker from official bear market territory.


But everyone stayed calm and by the close it bounced to 14,517 – a stunning, nearly 800-point recovery in the afternoon.


I hope you read my Monday morning newsletter, where I wrote that I thought the chances were 50/50 Powell would walk back the extreme tightening that is priced into the market.


Because with the NDX down over 11% in five trading days, any walk back will trigger a short squeeze higher. That will at least offer investors a second chance to hedge their portfolio. 


>> We’ll break that down when I go LIVE on Wednesday following the FOMC meeting starting at 3 p.m. Don’t miss this key moment. <<


To prepare you, I will share a couple of excellent ways to protect your portfolio by using Bond ETFs.


Know When to Fold’em and When to Hold’em


Regular readers of my Power Income newsletter understand how powerful Fed-generated flows are and how different 2021 was to what I am calling for 2022.


Notice the chart below, and the accelerating growth and Inflation trend from the second half of 2020 and most of 2021. 



Yep, the most powerful bull run in history.


Why?


One simple reason … The Fed printed money and most of it went into the market. Plus, the US government spent money and the Fed printed that, too, and much of that made its way into the market.


That is what we call a State 2 market. It’s defined by a stimulative Fed and government with growth and inflation accelerating. 


Not a hard environment to make money in, especially when you are given stimmy checks credited by the Fed, which is also injecting trillions into the market to help you out. 


There is now $18 trillion invested in NDX stocks, much of which is held by foreigners.


Take a look at that last chart again and the projected 2022 decelerating trends for both. The Fed is now threatening to withdraw funds from the markets and raise interest rates the entire year.


That is what I call Stage 4 market, defined as deflation. Stage 4 is the most stock market bearish while Stage 2 is the most stock market bullish.


Pretty wild to go from one to the other …


And that can only happen because the Fed controls the financial markets. 


Bear Markets Offer Tremendous Opportunity 


First, you need to understand what sectors of the stock market you should be long in Stage 4. 


Stage 4 stocks to own are utilities (XLU), consumer staples (XLP), real estate (XLRE) and healthcare (XLV) and of course optimal single stocks in each.


It is critical to find value and income stocks in bear markets. If you do and hedge it properly, you can build generational wealth. 


Now, the Russell 2000 index reached bear market territory today and rejected it big time. It went from down nearly 22% to down only 17.5% at the close. 


However, there was enough damage done that unless the Fed reverses the tightening policy and goes back to printing money – and lots more of it – the highs are in for a decade or more.


How to Hedge Your Stock Portfolio


Historically bond yields or interest rates move in tandem with stock prices. That is why you should hedge your stock portfolio with bonds.


Plus during a Stage 4 bear market, bonds are a most highly rated long outright.


So, holding stocks and bonds are valuable for a couple of reasons including:


  1. If you are holding the stocks I suggested earlier, then you are most likely collecting some nice dividend distributions. Plus their capital appreciation over the long-term.

  2. Bond ETFs also distribute dividends, so one compliments the other as an income generator.

  3. You can also complement the dividend income with premium income generated by selling calls against your stock and bond holdings, which can really boost your income generation.


iShares 4-7yr Bond ETF (Ticker: IEI)


IEI holds actual Treasury bonds maturing in the middle or belly of the US Treasury note market, holding mostly notes maturing between 3 to 7 years from now. 


These bonds are not as risky as longer maturities and are more influenced by the Fed’s policy, which is what you want. 


Here are the specs for IEI:



IEI is a deeply liquid, low-cost ETF. You trade IEI like you trade any stock ETF and it has liquid options as well. 


Currently IEI is yielding 1.14%, plus you earn any capital appreciation and call premium you sell. 

Diagonal option spreads are a great strategy for playing a longer term strategy with IEI. It involves buying a long expiry call at one one strike and selling a shorter expiry and lower strike on a separate call.


The idea is to keep reselling calls without losing the position and keep accumulating the shorter call premium as additional income in your portfolio. 


This is a very good time to begin a strategy because as I said earlier, the Fed WILL have to eventually go back to stimulating the markets by buying US Treasury bonds (QE).


The trigger will be lower broad equity index prices. When they do, you will see a very sharp rise in IEI.


So, if you are long the defensive stocks mentioned earlier plus bonds, you can crush it in a bear market. 


Bring It Home


I left out the other awesome stock you want to be long in a Stage 4 bear market … That of course is SPDR Gold Shares (Ticker: GLD).


How about yesterday’s action in GLD? The dollar was higher and GLD was in the green all day. 


We need to see a breakout above $1,880 and we will see some big money flow buying it. When the Fed does capitulate and go back to printing, GLD will soar.

 

I have many more great trade ideas to share, plus access to a system that will help you stay ahead of the Fed and consistently profit from the most powerful money flow in the world …

 

And you can access it when you register for my Power Income Trader live presentation this Wednesday. It begins at 3 p.m. immediately following the Fed’s FOMC meeting. 

 

I’ll see you on Wednesday.

 

Until then …

 

Live and Trade With Passion My Friends,

 

Griff

 

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