It’s a Good Time to Buy a Little Stock Market Insurance

0 | By Shah Gilani

The stock market – whichever major benchmark of “the stock market” you may follow, be it the Dow Jones Industrials Average, the Nasdaq Composite, or the S&P 500 – has been on a crazy bull run.

Me? I’m still a raging bull.

But if there’s a cheap way to buy insurance on the market faltering, I’m buying it.

No, I don’t think the market’s going to crash. It’s not even done going higher. In fact, I believe it’s going at least another 10% higher, maybe more.

It’s just that I like buying cheap insurance when I can. I may never need it, you may never need it; still, that doesn’t stop us from buying insurance on our cars, homes, or other investments, does it?

Here’s what constitutes cheap insurance and why right now may be a good time to pick some up.

“Markets Don’t Go Up In a Straight Line”

The saying is markets don’t go up in a straight line. But if you look at the stock market’s run-up since 2009, you might take some issue with that.

Sure, the run-up hasn’t been a perfectly straight line – there have been minor scares and one ugly scare (the selloff from October 2018 through December 2018) – but the markets have continued to climb higher and higher.

This year is no exception.

The run-up in 2019 almost looks like a straight line. Of course, a closer look reveals there were some hiccups and some sideways action.

Then we got into November and we saw an almost straight move up. Sure, we got a hiccup in early December, but we’re back on the uptrend.

It’s all good… until it isn’t.

There are a lot of things driving the market higher. I talk to you about them all the time in great detail here at Wall Street Insights and Indictments and even more so in my Capital Wave Forecast, which you get free every Monday.

Of all the drivers and the potential breaking points, there’s one I don’t spend a lot of time explaining.

Now the Time Has Come

PE, which stands for price-to-earnings, is a measure of value for a stock or the market.

PE is calculated by dividing a stock’s price by its 12-months trailing (TTM) earnings or 12-months forward expected earnings. The same holds true for any market measure or benchmark index.

The S&P 500 – the institutional benchmark index against which most money managers are measured – as of December 13, 2019, had a PE of 24.85, according to Birinyi Associates.

The historic average PE for the S&P 500 from January 1971 to June 2017 is 19.4. The median PE of stocks in the S&P 500 over that time period is 17.7.

Based on the more modern history of the S&P 500 (some analysts use a longer historical measure, going back to World War II or earlier, which lowers the historic PE closer to 16 to 18), the S&P benchmark as of December 13, 2019, is 28% higher than its modern historic average.

That’s starting to scare some investors and a lot of analysts.

Not incidentally, the S&P 500 closed on December 13, 2019 at 3168.58. It closed yesterday, December 16, at 3191.45. With the TTM S&P 500 earnings used in December at $127.50, leading to a PE of 24.85, as of yesterday, the S&P’s PE was 25.03 and continues to climb.

As the benchmark’s PE rises, analysts and the media are going to have a lot more to say about the “value” investors are getting with stock prices up beyond historic norms.

There’s more to PE than just what the market’s trailing PE is. There’s “forward PE” and how fast or slow earnings are growing. Those components of the PE equation are important and often tell different stories.

For example, I’m still bullish because I believe earnings are going to grow faster than most analysts are calling for, and that will bring both forward and eventually trailing PE numbers down.

That’s a big deal.

But it’s the end of the year and everyone’s going to start talking about how far we’ve come this year, since 2009, and whether the market’s overvalued or not.

The Cheap Insurance Stocking Stuffer This Year

That’s where insurance comes in. If talk turns ugly and sentiment turns even a little negative, it won’t take much to push stocks lower as the holiday season progresses and investors are more focused on things other than the market.

I’m not betting on a selloff. But if we get one, I want to be prepared.

My insurance is buying call options on the VIX – the “fear index”, as it’s called.

If any hard, fast selling takes hold, the VIX will start to jump higher.

Since the VIX is back trading below 13, it’s a great time to buy cheap call options on it possibly rising to 16, 17, 18, or higher.

That’s what I consider cheap insurance.

Buy some for yourself as a stocking stuffer.




PS: Last week, I saw a good friend of mine, Tom Gentile, at our company holiday party. At one point during the night, we ended up joking about stocking stuffers – which is why I added that last line. But Tom showed me some of his recent research during the conversation – on something he calls “microcurrencies” – that left me in awe. These are tiny currencies, made for specific uses, which have the potential to skyrocket 60,000% in a matter of days. I got a preview of them last week, but he’s going to share all of it with you tomorrow. Talk about a cheap stocking stuffer. Stay tuned, he’ll be with you tomorrow.

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