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Summary Diversification doesn’t protect against market risk. When the market melts down, nearly all stocks drop. Value stocks drop too, though sometimes by not as much. What does go up when the market tanks: hedges and inverse ETFs. The Gods of the Copybook Headings After this latest Black Monday in the markets, literary-minded investors may be reminded of Rudyard Kipling’s 1919 poem, The Gods of the Copybook Headings . That poem, about the folly of ignoring timeless lessons, has been praised by Vanguard founder Jack Bogle as “beautifully capturing” the economic wisdom of Shumpeter and Keynes (as Wikipedia notes ). If we forget these lessons, Kipling warned, As surely as Water will wet us, as surely as Fire will burn, The Gods of the Copybook Headings, with terror and slaughter return! With Kipling’s admonition in mind, let’s look at a few lessons from Monday’s market meltdown, when the S&P 500 was down 4%, on the heels of last week’s losses. Diversification Doesn’t Protect Against Market Risk As Seeking Alpha news editor Carl Surran noted on Monday (“Stocks plunge to historic lows after midday rebound loses steam”), Today’s selling was far-reaching with just 136 NYSE listings ending positive while 3,079 names posted losses; all 10 S&P sectors finished in the red, with losses ranging from 3.1% (telecom services) to 5.2% (energy). The picture was similar on the Nasdaq , where 351 names were in the green, compared to 2,587 in the red. This highlights why diversification doesn’t protect against market risk: when the market tanks, nearly all stocks drop. Value Stocks Aren’t Immune To Market Risk On Monday, value stocks were in the red as well, though, less so than the market as a whole. The iShares S&P 500 Value ETF (NYSEARCA: IVE ), for example, was down 2.86% on the day, versus the SPDR S&P 500 ETF (NYSEARCA: SPY ), which was down 4.15%. What Went Up on Monday: Hedges and Inverse ETFs Last Wednesday, via Twitter (NYSE: TWTR ), we shared this hedge on SPY: Here’s how that hedge reacted to the market drop on Monday: Hedges on individual stocks reacted similarly. For example, in an article published on Friday (“Adding Downside Protection To Tesla”), we presented a collar hedge on Tesla (NASDAQ: TSLA ) created as of last Wednesday’s close. Although the stock declined 14.3% from last Wednesday’s close to Monday’s close, an investor hedged with that collar would have only been down 4.2% over the same time frame. In addition to hedges, some inverse ETFs were up as well on Monday. As we noted in a post written over the weekend but published on Monday (“A Lower-Risk Way To Bet Against Oil”), the ETF with the highest potential return in Portfolio Armor’s universe, as of Friday’s close, was the ProShares UltraShort Bloomberg Crude Oil (NYSEARCA: SCO ). That ETF was up 11.14% on Monday: Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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