Despite being mired in a trading range, global equity markets outpaced my expectations during October and November. The fear gauge, as measured by various volatility indexes, indicates relative calm among equity traders. And continues to decline. No hint of an impending tsunami… despite all evidence to the contrary.

To me, this looks like a market acting irrationally. No concern for seismic activity under the surface. Traders playing a game musical chairs to the tune of a stimulus tsunami that will eventually wreak havoc on taxpayers saddled with the bill. But that’s not on the radar because we don’t know the how bad it is now, and how bad it will get. What with trillion dollar deficits continuing to add to the problem.

Recent US employment data continues to paint a bleak picture. And while this is a lagging indicator, the headline 10.2% unemployment rate is disconcerting. As is the fact it is still rising.

Dig deeper and the numbers are staggering. How about an underemployed rate of 17%, that factors in those who have given up looking for a job, and those working part time jobs, until something real comes along. Factories operating a 70% capacity is a chasm that will have to narrow before anyone can talk seriously about sustainable growth.

I haven’t even discussed concerns around commercial real estate, much of it having to be refinanced over the next two to three years. Falling values for commercial real estate (much of it valued less than current mortgages), and rising vacancy rates will make it difficult to re-finance using traditional models.

So we have it, a market acting irrationally! The problem is markets can remain irrational long after traders run out of money trying to be rational. My suggestion… don’t try to be rational!

Instead practice what many professional floor traders always do, and follow what many hedge funds are doing. Which is to say, remain hedged. How many times have you heard money managers say they are bullish, but that they remain vigilant. That’s simply code for being hedged.

You might also want to take note of what professional floor traders have been saying. Specifically that they are willing to follow the momentum – which is certainly bullish – but that they will be quick to “push the sell button” should momentum abate.

I would certainly encourage you to maintain hedged positions. Which may include covered call writing on value stocks with decent dividends, buying puts on broad market indexes like iShares CDN S&P TSX 60 Index fund (TSX: XIU). You could also keep some money in gold, although I would prefer to hold gold stocks and write covered calls.