The rally is showing signs of exhaustion. How to protect your portfolio if a decline is coming

Published Wed, Feb 28 202410:30 AM EST

As markets pause ahead of this week's inflation numbers and with investors showing a lot of complacency, I believe it is now worth taking out portfolio protection by simply buying puts. This is especially true if you have significant long exposure in equities at the moment like I do. The past few months have forced many investors to cut short positions and maintain a sizable net long position to keep up with the market. This has left many portfolios substantially exposed to any downside. Couple this with the multiple signals for exhaustion that are typical near market tops, it warrants taking action. Troubling technical signs We've seen the SPDR S & P 500 Trust (SPY) and Invesco QQQ Trust (QQQ) both exhibit higher highs in price while momentum and their advance-decline lines print lower highs. The S & P 500 has also generated a DeMark 13 count on the weekly chart for those who follow DeMark's work. Additionally, the percentage of stocks that are above their 20-, 50- and 200-day moving averages are declining despite equities pushing to new all-time highs. And lastly, these same signals are showing up across the major sectors, and individual stocks that have led this rally such as Nvidia. Overall, these are signs of exhaustion for this rally and raises the probability of a pullback. With the PCE inflation number on Thursday morning as a potential catalyst for volatility, it would be prudent to purchase some insurance when it is relatively inexpensive, as it is now. With the Wall Street's fear gauge, the CBOE Volatility Index ( VIX) , trading just above 13, purchasing downside protection on a portfolio using SPY options is relatively inexpensive. The trade When options are this cheap, we can purchase protection with a simple put option on the SPY, especially with catalysts that could move markets and sharply increase volatility this week. There isn't much support on SPY until the $480 area and equities could tumble quickly in the event of a macro catalyst. I'm looking out to the April 30 th expiration and buying an out-of-the-money put option with the strike price of $495 at a $4.50 debit. This would risk a total of $450 per contract, which is only 0.88% of the value of the ETF, while providing me with significant downside protection if markets turn lower over the next month or so. DISCLOSURES: (Zhang has put positions in the SPY) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.