If you think the summer’s volatility was vicious, you haven’t seen anything yet…
What I’m about to show you suggests we’re on the verge of another gut-wrenching collapse.
How bad could it get?
Worse than you think.
Catching a Bad Break
More than six years removed from the credit crisis, the recent havoc served as a stark reminder the current bull market can and will come to an abrupt end.
And when it does end, if it hasn’t already, history has shown most investors will have disregarded all the warning signs.
However, you don’t have to be like most investors. Can you afford to be like them? I know I can’t and that’s why there is one recent event that has me acting more cautiously than at any point in the last seven years.
The situation is simple and something you’ve seen before.
When it comes to the broad market, history repeats. Always.
The chart below is the perfect example of history repeating itself.
And if you look closely, I think you’ll agree we’ve already passed a major -- and disastrous -- turning point in the markets.
Take a look at a chart of the Dow over the last 20 years to see what I mean:
The long-term chart cuts out all the day-to-day volatility, short-term panics, and everything else that feels far worse in real time and does nothing more than obscure your vision on the big picture.
It also shows market moves are actually quite orderly when you take a step back to view the bigger picture swings…
More importantly, how those big swings are predictable too.
Back to the chart. Throughout the period covered, there were three major market rallies. The first two rallies were both followed by sharp downtrends. We’re in the third rally right now.
The thing about each previous peak though is both had something in common when they ended -- there was a bearish break in the trendline that supported the price (note: the support trendlines are in white on the chart).
The trendline was broken in early 2002. Stocks fell 30% from there.
It happened again in 2008. Stocks slid 48% from there.
In this summer’s market carnage, it happened again too.
Will this time be different?
But that’s not something I’d bet my and my family’s financial future on and you shouldn’t either.
Instead, here’s what I’m looking at today.
What Goes Up...
The Dow’s downward spike this summer is far more important than most investors realize right now.
The drop essentially snapped a seven year uptrend and, barring any major unforeseen interventions or events, will likely serve as a major deterrent to stocks setting new all-time highs again.
I know, I know....
“Summer was awful. Stocks are back though. The Dow is just 7% away from setting another new high. Oprah bet $42 million on Weight Watchers (WTW) shares. She’s nearly tripled her money already. Oprah, Stephen, OPRAH!”
I get that. But I’ve been doing this a long time and know when the trendline is broken, you just realize it’s broken.
The sooner you accept it and do something about it, the better it will work out in the end.
That’s why the recent uptick in prices isn’t anything new or anything to worry about. It’s actually an opportunity.
Once price breaks down through a support trendline, it has to come back up and test it before falling further.
If you believe what I’m saying is all technical fluff, take a look at the chart one more time (I’ve put a copy in below so you don’t have to scroll up).
This time though, focus on the red arrows.
The arrows highlight bullish bounces which followed each of the two previous breakdowns in major trendline support. Not one of them held up for long.
That’s why I’m genuinely worried now. More so than in years.
Should equities roll over and create lower lows, then we’ll have full, 100% confirmation of more ominous downward pressures to follow.
The inevitable panic following that will be quick and severe.
Of course, this doesn’t mean you should sell everything and sit on cash. It means you should start considering what options you have to do about it now.
One simple and easy-to-understand option is inverse ETFs. They’re built for sole purpose of profiting from a decline in the value of an underlying index may very well do the trick. And you can buy them as easily as buying a regular stock too.
These ETF’s accomplish the same thing as shorting stocks, but sidestep the mechanics of actually shorting a stock and the psychological bias against shorting.
In relation to the overall equity markets you’ll be primarily focusing on the Short (1x), Ultrashort (2x), UltraPro (3x) MarketCap ETFs.
The number with the letter “X” simply refers the degree to which the inverse ETF will move counter to that of the standard market index.
For example, if you were to buy into an UltraPro (3x) inverse ETF then you’d carry three times the profit should the underlying benchmark decline in value, and alternatively three times risk if the opposite scenario is true.
Before placing your lot with inverse ETF plays -- or any investment for that matter -- review the average daily volume data to make sure there’s enough liquidity to allow for fair entry and exit points without the fear of being forced to stomach an unacceptable price.
These tools and more will allow you to more than just survive a downturn in stocks. They’ll allow you absorb the worst of it and be in great position when the next upturn begins.
If you’re worried about stocks or aren’t prepared for what to do in a sustained bear market, the recent market events say if you get prepared now, you won’t regret it in a few months time.