Stocks & Commodities V. 26:7 (14-16): Forex Focus: Hedging Against A Bear Market by Matthew Caruso

Stocks & Commodities V. 26:7 (14-16): Forex Focus: Hedging Against A Bear Market by Matthew Caruso
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Forex Focus: Hedging Against A Bear Market by Matthew Caruso

Ever considered foreign currencies during a bear market? Here’s why you should.

It has been more than five years since the last bear market in US equities ended. The recent explosion in volatility in the markets and the 507-point, or 4.19%, oneweek fall in the Dow Jones Industrial Average (DJIA) during the week of January 18, 2008, has led to many inquiries about the best way to hedge against a bear market in US equities.

Buying gold is often said to be the simple solution to hedging against a falling stock market, but gold fell $16, or 1.8%, during January’s largest weekly decline. Anyone seeking shelter in gold was shocked with a loss rather than a profit to offset the weak stock market performance. Perhaps the market wisdom of hedging a falling stock market by buying gold may not be true. A good starting point in seeking the best stock market hedge would be to examine which markets would have produced a profitable alternative to equities during the stock market’s large weekly decline.

PROFITABLE ALTERNATIVES

Alternative markets related to the equity markets include foreign currencies, bonds, and precious metals. They will be examined in order to see if any of these provided a good hedge in January’s largest weekly decline as well as in past bear markets. In addition, sectors within the market such as consumer staple stocks and utilities are often cited as a way to sit out market corrections due to their position in the economy and their typical status of being large dividend payers. Therefore, stocks from these sectors will also be studied in detail.




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