Hedge: Short the Russell 2000 and Buy the Dow Jones Industrial Average

November 28, 2017, 10:20 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Using a combined technical analysis of four major markets awning near term, midterm, and longer-term basis, Stock Traders Daily draws conclusions every day about the direction of the market in the future.  For some the near-term timeframes are most important, for others the midterm timeframes are more important for swing trades, and others focus on longer-term durations.

This observation is focused is on the immediate time frame. 

Before anything, it is important to recognize that our combined analysis has risk warnings in multiple places, but the most vulnerable market based on our technical observations is the Russell 2000.  On the opposite side of the spectrum is the Dow Jones industrial average, and that sets the stage for this observation.

For the Russell 2000 focus on ProShares UltraShort Russell2000 (ETF) (NYSEARCA:TWM)

For the Dow Jones industrial average focus on ProShares Ultra Dow30 (ETF) (NYSEARCA:DDM)

Although current observations show us that upward sloping channels exist in most of the markets we follow, and every one of them is in an upward sloping channel on a longer-term basis, there are still serious potential pitfalls.  The most immediate is the tax debate and although there is an underlying bid to buy this market stemming from central banks stimulus efforts that will soon dissolve, that money is still flowing like clockwork and until that stops the underlying bid that currently exists in the market will still exist to at least it’s marginal degree. 

We have also defined the duration and a marginal influence of central bank stimulus in our special reports for longer term investors, but for traders who embrace volatility those observations are equally as important.  Natural volatility will return soon.

However, we’re not talking about natural volatility in our immediate observation.  Instead, the possible volatility catalysts that exist today are rooted in political banter.  Risks are high because no one knows if the Senate is going to be able to successfully pass their version of tax reform, but the underlying central bank influence exists at the same time.

This begs the question where does the money go from central banks stimulus now?

One thing is for sure and that is the assets being purchased are on the more conservative side of the spectrum, so the reinvestment of those monies is likely to be focused on the same for at least the time being.  This implies that the focus of institutional investors who have assets purchased from them by central banks in the current environment are much more likely to focus on assets that are at least defined as relatively conservative.  On the equity side of the picture that implies the Dow Jones industrial average, and not the Russell 2000.

What’s the conclusion?

The conclusion is that investors who want to take advantage of a possible aggressive market moved in one direction or the other in the near term can use a technique that integrates the Russell 2000 and the Dow Jones industrial average on opposite sides of the spectrum.

Short the Russell and by the Dow Jones industrial average for a competitive hedge.

Signals to buy or short may have already been provided to clients of Stock Traders Daily and actions may have already been taken by them accordingly.  

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