It's time to buy insurance: David Rosenberg

The highly anticipated week of the Federal Reserve's policy decision is finally upon the market. As Wall Street braces for what could be the first interest rate hike in nearly a decade, one top economist warns it's time to buy insurance against whipsaw price action.

On CNBC's "Futures Now" last week, Gluskin Sheff's David Rosenberg said that historically, when interest rates increase, so does volatility. "The VIX [CBOE Volatility Index] is going to rise in the next year. Typically when the Fed starts to raise rates in that first year, it doesn't mean you have a bear market but you do have heightened volatility," he said.

The VIX surged above 20 for this first time in a month on Friday to its highest level since early October. This as a sharp sell-off in U.S. and global equities had investors running for cover. Rosenberg expects the market to stay flat over the next year.

"It could go as high as 28," Rosenberg said of the VIX. Super spikes in it tend to correlate with selling in the S&P 500.

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Year of the 'barbell'

Rosenberg said there are two identifiable risks in the coming year: one being the heightened volatility after a Fed rate hike, and the second being geopolitical factors. These two combined factors made him coin 2016 as "the year of the barbell" —a term for an investment method focused on finding an equal balance in risk and reward.

"You want to barbell [your insurance] against the geopolitical risks," added Rosenberg, who identified the biggest threat as the war on terror. "If all NATO countries live up to their commitments, the incremental spending on global defense would approach $100 billion," Rosenberg said. "How you hedge that is buying defense stocks."

Big defense stocks like Northrop Grumman, Lockheed Martin and Raytheon have rallied a respective 26 percent, 13 percent and 17 percent year to date. He also recommended looking toward the lesser-known Israeli defense stocks listed on the Nasdaq composite such as Elbit Systems and Tat Technologies, which have rallied 36 percent and 11 percent, respectively, in 2015.

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"Be long the VIX and long global technology," Rosenberg said.


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