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Sell In May? No. Hedge Once Again

The second hasn't fully impacted upon the economy yet, but you can expect the ACA to thwack payrolls by the fourth quarter of this year. However, I don't imagine the impact of the ACA will be as incendiary as many claim -- not because the ACA isn't an unmitigated weapon of mass financial destruction, but I forecast the ACA becomes significantly watered down from its current form. The ACA is so ruinous in its current form that even Congress is waking up to the reality of the negative impact.

The third key driver is the cost of energy and, in particular, the price of oil. I have many articles about why oil will continue to fall in price, including this one "Forget About Fracking, the Gulf May Lead Oil Lower."

Falling energy prices is a bullish catalyst for the economy and the market should not be discounted. It's a tremendously big deal on par with any other catalyst in the market.

Taken as a whole, with the chart and the fundamentals, I think the odds favor a retracement in the S&P 500, but instead of shorting the market, the best course of action is to remove some gains off the table and prepare to buy the shares back on a dip.


One way to take gains off the table is through the use of options. For example, if you currently have 1,000 shares of SPY, maybe sell covered calls on the shares you would otherwise sell. By selling the June $150 strike calls that are deep in the money, you have about an 85% chance of the shares being called away.

You can acquire, at the time of writing, about $10.20 in premium, for a sale price including premium of $160.20, almost a full dollar above the current market price of $159.38. If the market falls by greater than expected and the SPY is trading below $150, you gain $10.20 in time premium that lowers your cost basis and risk.

At the option expiration date, you can reassess the market and decide if you want to cut back further or if it's time to add on more exposure. You will have greater clarity of what to expect from the ACA and if the Federal Reserve is slowing down the printing press.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Stock quotes in this article: SPY, CIM 

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