šŸ’² Taking Profits vs. Hedging: Which is Better?

Whatā€™s on the Menu šŸ“

Today was a big inflation report that sent marketing moving and shaking.

The question is, will this data be enough to start the rate cut cycle?

It also has us asking the question: Is good news finally bad news?

Letā€™s go!

  • Stocks Take A Rest As Inflation Signals Rate Cuts šŸ’¤

  • Taking Profits vs. Hedging: Which is Better? šŸ’² 

  • Where Is The Bull Market Excitement? šŸ§

Todayā€™s newsletter is a 5 minute read.

Stocks Take A Rest As Inflation
Signals Rate Cuts šŸ’² 

After 6 days in a row of the S&P 500 making all-time highs, we finally came across a day of weakness.

The S&P 500 was down about 1% after the latest inflation report (CPI) showed lower than expected inflation. The expectation was 3.1%, and the headline number came in at 3%.

Re-inflation and even stagflation fears started to circulate back in August 2023 when the inflation number rose unexpectedly.

This most recent report is soothing those fears that inflation could runaway again in the near future.

The inflation report also led to a rotation in assets.

Large caps (measured by the S&P 500) were down while small caps (measure by the Russell 2000) were up on the day.

This move largely comes from the idea that the Federal Reserve will start cutting rates sooner.

Small caps should benefit from a lower interest rate environment as capital needed to grow becomes less expensive.

The odds of a September rate cut have now increased to 84.6%, up from 46.8% just one month ago.

The Fed still has a balancing act to perform between cutting rates, and not reigniting inflation.

However, itā€™s unlikely that rate cuts will be significant enough in 2024 now that weā€™re half way through the year with still not 1 single cut.

Cuts will likely be small based on the rest of the data thatā€™s out there.

Slow and steady will likely still be the playbook through the rest of the year.

Taking Profits vs. Hedging: Which is Better? šŸ’²

When the marketā€™s doing the cha-cha, should you cash out or just hedge your bets?

It's a million-dollar question (sometimes literally).

Letā€™s dive into the pros and cons of each strategy so you can decide what suits your portfolio best.

Taking Profit: The Safe Exit Selling off some or all of your position when the price is high can feel like a victory lap. Youā€™ve locked in gains and can now flex those profits.

But hereā€™s the catch:

Uncle Samā€™s waiting with his hand out. Capital gains taxes can take a significant bite out of your earnings.

Plus, once youā€™re out, you're out. If the assetā€™s value skyrockets after you sell, youā€™re left kicking yourself on the sidelines.

Pros:

  • Cash in Hand: Realized profits can be reinvested or used as you see fit.

  • Reduced Risk: Selling reduces exposure to potential downturns.

  • Simplicity: No need to manage complex hedging strategies.

Cons:

  • Taxes: Capital gains taxes can significantly reduce your take-home profits.

  • Opportunity Cost: You miss out on any further upside potential.

  • Transaction Costs: Selling positions can incur brokerage fees.

Hedging: Playing Both Sides Hedging is like having your cake and eating it too.

By using financial instruments like options, futures, or inverse ETFs, you can protect your portfolio from downside risk without having to sell your positions.

This strategy is particularly useful if you believe in the long-term potential of your investments but are wary of short-term volatility.

Pros:

  • Tax Efficiency: Avoid triggering capital gains taxes.

  • Maintain Exposure: Keep your positions intact while mitigating risk.

  • Strategic Flexibility: Adjust your hedges as market conditions change.

Cons:

  • Cost: Hedging strategies can be expensive and eat into your profits.

  • Complexity: Requires a good understanding of financial instruments and market movements.

  • Potential for Losses: If not executed properly, hedges can result in losses or reduced profits.

Real-World Example Imagine youā€™re holding onto a hot tech stock thatā€™s had a massive run-up.

Selling now means you secure profits but could miss out on more gains if the stock continues to rise.

On the other hand, hedging with put options allows you to lock in a floor price, protecting you from a major drop without giving up your shares.

So, which strategy is right for you?

It boils down to your investment horizon, risk tolerance, and tax considerations. If you need liquidity or want to de-risk completely, selling might be the way to go.

But if youā€™re in for the long haul and want to safeguard against market dips, hedging can offer a smart alternative.

In the end, itā€™s not about choosing one over the other but understanding how each can serve your financial goals.

Where Is The Bull Market Excitement? šŸ§

Bull markets are beloved. They create excitement and thrill amongst investorsā€¦ so, why does this current stock market bull feel like itā€™s falling soā€¦ flat?

I sent out a tweet with this thought and some of the responses were worth expanding on.

Letā€™s dive in.

When we see the stock market at all-time highs, we usually see a lot of speculation happening with traders.

While GME (GameStop) showed speculators were still out there, itā€™s nothing like weā€™ve seen in the past.

Could the traders be struggling with grocery bills and not have the cash to play? Itā€™s possible.

The stimulus money is what made 2021ā€™s bull market so ā€œcolorfulā€. People had the cash to spend on speculating in the markets.

Matthew simply makes a good point. People seem cautious of a correction as the market rockets higher, but, when we see that inevitable selloff, investors let fear take over when they really should be investing.

Be prepared so you donā€™t fall into this trap.

Could the lack of the ā€œherd mentalityā€ that we usually see be a good thing for the longevity of this bull run?

This is a very weird market because we know people are ā€œbuying big tech at any priceā€, as prices run higher, but, the overall sentiment seems cautious over mag 7 concentration and valuations.

So, what gives? The action of the market isnā€™t aligning with what investors are saying.

But, it does make you wonder if the bull run could have more juice since we are hearing narratives of things being ā€œoverheatedā€.

Truly, itā€™s a great bull market to be invested in, but, there are many forces at work keeping investors hesitant and guarded despite the prices moving higher.

If the stock market could have a relationship status, it would probably be: ā€œitā€™s complicatedā€.

Food For Thought šŸ§ 

"Investing is not a game where the guy with the
160 IQ beats the guy with the 130 IQ."
- Warren Buffett

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DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We donā€™t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.