This is not the way we want to be right. 

There was bound to be something that caused a sell-off.  On Friday, we noted the massively overbought conditions that led us to bumping up our SDS hedges and yesterday morning, we marked off our lines for shorting the Futures at 2,040 on the S&P (/ES), 17,550 on the Dow(/YM) 4,415 on the Nasdaq (/NQ) and 1,100 on the Russell (/TF).  If it wasn’t this morning’s bombings in Brussels, it would have been something else – the markets were bound to have a pullback after a 10% rally.  

As much as we hate to think about it and discuss it, the possibility of terror attacks is ALWAYS a factor in hedging our portfolios for possible sudden downturns. These things can happen at any time and believe me, as a New Yorker, I can tell you that things can get very bad, very suddenly. When 9/11 happened Wall Street was shut down for 3 days and, when it opened, we had gapped down 10% and quickly fell another 10% – can you afford to have that happen to your positions?  

If not, you need to learn how to hedge and THAT is why we ALWAYS have downside protection in our portfolios and that is why, especially when there’s a good bull run like last Friday – we spend a little more of our unrealized gains on insurance and THAT is why we like to have plenty of CASH!!! in our portfolios – just in case.   

I’m not a fear-monger and I’m not an alarmist – terrorism is simply a very real fact of our lives and it will happen again. Already the market’s ability to shrug off these incidents is amazing but it’s always amazing what people can get used to if it happens often enough. When I was a kid, we still did duck and cover drills under our desks at school – then we’d go out and play. 

If you did not follow our advice and hedge at the top last week or yesterday, today you’ll need to chase something and you’ll pay more for the same protection.  Just like any insurance policy – it’s cheaper when you don’t seem to need it. No matter how much you think the Central Banks are backstopping your play – there are certain things that are out of their hands.