A Cheap Hedge in a Frothy Market

The S&P 500 has roared from from the February lows of 1810 to 2110 in late April, then traded in a range from 2030 to 2110 through late June when the Brexit reality knocked the market down 6% in 2 trading sessions. By the following week, those losses were erased and we are now setting all time highs on the S&P which levitates around 2,174. While the rally has been great for our long positions, and we've only been long, we're seeing signs of a correction coming. See the chart below with red arcs over changes in appreciation in the S&P. This isn't a scientific or hard and fast marker for a decline ahead, however the rally may be exhausted for the short term and the market needs to take a breath. Rallies in the market are often marked with intermediate declines, and whether we continue higher in the uptrend, or if this is a key reversal, we believe that there's a short-term decline in the S&P coming in the near term.

We can hedge our long exposure by picking up a very cheap hedge in the XLF, which is the Financial Spider ETF. We are buying the September $23 Puts on the XLF for $.34 cents. Currently the XLF is trading around $23.65, and is also showing signs of the same topping process. You'll see this in XLK (Technology) as well. These Puts will expire in 56 days, and a drop in the Financials will yield a profit for us in this trade.