According to Shah, the Dow Jones Industrial Average could hit a high note any day now. On his latest sit-down with Fox Business host Charles Payne, Shah covers everything from another Fed rate-hike delay and the commodities rout to China and some of the biggest names in tech.
What would it would take to push the Dow to new recent highs? How are some of the biggest names on Wall Street faring heading into the fourth quarter? Shah lets us know in the video below.
Most investors look at the stock market in a very conventional way.
Bull markets are good. Bear markets are bad.
As a tech-investor friend of mine has said, that’s a “binary” view of the financial markets.
You make money when stocks rise. You lose money when they fall.
But I’m different. I’m a trader. I just look for opportunities – wherever they are.
And I believe there’s always a place to make money.
When stocks rise, I make money – by “going long.”
When stocks fall, I make money – by “going short.”
If you’re tired of getting beaten up when stocks dive – which they’re doing again – it’s time you learn how to punch the stock-market bear right in the schnozz… and transform market sell-offs into “Extreme Profit” opportunities.
It’s simpler than you think.
The windfall will be huge.
And today I’m going to show you exactly how to do it…
Beware of Falling Stocks
There’s a reason most retail investors obsess over the long side of the market and ignore the short side: The short side seems complicated, risky and expensive.
Those worries have a basis in reality. To short stocks, you need a margin account or you have to use options. And unlike their long side counterparts, investments on the short side can pose situations where the loss potential is unlimited.
With my strategy, you can sidestep all of that complexity.
Because inverse funds rise in price when stocks head south, not only will you never fear markets again, you might actually welcome downdrafts and bear markets.
Why would you welcome down-trending markets? Because stocks always fall faster than they rise.
So not only will you make money on falling stocks… you’ll make it quickly.
Inverse ETFs are designed to do the opposite of whatever the index they track does.
For example, let’s assume one of your holdings closely tracks the Standard & Poor’s 500 Index. Perhaps it’s an actual “index” fund. Or maybe it’s an ETF, a basket of stocks that’s designed to mirror the performance of the much followed 500-stock index.
If you reach a juncture where you’re worried – or downright believe – the S&P 500 is headed down, you don’t have to sell your mutual funds or ETFs or liquidate your stock portfolio.
You can just buy an inverse ETF.
In fact, you can buy an inverse ETF based on the S&P 500 index. The ProShares Short S&P 500 ETF (NYSE ARCA: SH) is designed to move opposite the S&P 500. If the S&P 500 goes down 2%, SH will go up 2%.
That’s what inverse funds do.
Not a Marginal Call
The beauty of inverse funds is that you are essentially “shorting” the market – or whatever index you’re interested in – by buying a fund.
Because you’re buying – purchasing a security – you don’t need a margin account.
Think about that for just a moment. It’s a very powerful idea.
Being able to short the market simply by purchasing a fund is a game-changer for most investors who don’t know how to short, don’t like to short or can’t short because they hold stocks or mutual funds in a retirement account.
This is important to understand, because it’s one of the true hidden benefits of inverse ETFs.
When you short a stock – or an ETF – you have to do it in a margin account.
There’s a reason for that.
When you short a security, what you’re actually doing is selling something you don’t own.
You “borrow” a security from someone else, sell it and reap the proceeds of the sale.
As a short-seller, you do this believing the price of that stock or fund is going to fall – meaning you’ll be able to buy back in more cheaply sometime in the future.
The difference between the money you brought in when you sold it high – and the cash you spent to buy the stock back cheaply after its price has fallen – is your profit.
Here’s the problem.
When you sell something you don’t own, its trading price can theoretically keep going up, meaning you’ll keep losing money. Wall Streeters refer to that as having “a trade go against you.”
And if your short goes against you enough, you’ll get a “margin call,” meaning you’ll have to add more capital to your account.
The more your position goes against you, the more margin you’ll have to put up.
You can’t short in an IRA account because IRAs can’t use margin.
Most people – including your broker I’m willing to bet – don’t know why you can’t use margin in an IRA. It’s because you’re limited to how much you can put into your retirement account in any given year. If you traded on margin and got a margin call and couldn’t put up any more money because you maxed out your contribution for the year, that wouldn’t work for your brokerage company. That’s why you can’t short in your retirement account.
But, of course, you can buy. That’s what makes inverse ETFs so genius. You can short markets all you want by buying inverse ETFs.
The “Big Three” – and I Don’t Mean GM, Ford and Chrysler
I use ETFs to buy these “markets.” The ETFs that mimic these three U.S. benchmarks are the SPDR S&P 500 ETF Trust (NYSE ARCA: SPY), the SPDR Dow Jones Industrial Average ETF (NYSE ARCA: DIA) and the PowerShares QQQ Trust Series 1 ETF (Nasdaq: QQQ).
When I think the markets are going to head down, I can sell my ETFs and then turn around and short any or all of these three – as long as I do that in a margin account.
A lot of the time, however, instead of shorting these ETFs, I’ll buy inverse ETFs instead.
The inverse ETF that moves opposite the S&P 500 and SPY is the aforementioned ProShares Short S&P 500 ETF (NYSE ARCA: SH).
The inverse ETF that’s the counter to the Dow and DIA is the aptly tickered ProShares Short Dow30 Fund (NYSE ARCA: DOG).
And the inverse fund that moves opposite the Nasdaq and QQQ is the ProShares Short QQQ ETF (Nasdaq: PSQ).
I like these three funds – I refer to them as the “Big Three Inverse ETFs” – because they’re super easy to buy, are cheap on account of their low expense ratios and have very tight spreads all day long.
Even if your stocks or mutual funds don’t exactly mimic these benchmarks, you can still hedge what you own pretty easily. Estimate their total market value and then buy enough of one of these inverse ETFs so if the value of all your holdings fall by 5%, 10% or more, you make that much when your inverse ETF advances by about the same amount.
There are lots of inverse ETFs that you might want to use to hedge your portfolio instead of the Big Three.
That’s what’s so great about ETFs – and underscores why they have been such huge market Disruptors in the financial-services arena: ETFs come in all sizes and flavors and can be used to create liquid, easy-to-execute trading strategies to pursue almost any objective you can think of.
Inverse ETFs are no exception.
If you’re worried about the broad stock market, there are inverse ETFs available to protect your overall holdings. If you’re worried about a specific industry, a business sector or even a geographic market, you can bet there are inverse ETFs available to protect that portion of your portfolio.
There are even inverse ETFs that will let you hedge things besides stocks – other classes of assets. We’ll get into all of those in the weeks ahead.
In one upcoming report on these great financial Disruptors, I’m going to tell you about leveraged inverse ETFs, which move two or three times as much as their non-leveraged inverse counterparts.
But the opportunity that has me the most excited right now is the one that will let us employ these inverse funds for pure profit.
Our first big opportunity to profit from what could be a big downdraft looks like it’s shaping up right now. Judging from the way the markets are acting, I won’t be surprised to see stocks drop back to their August lows – and then crash through those support levels to find even lower lows.
I’ll be back very soon to tell you what to look for and to spotlight the inverse ETF we’re going to play to before that happens.
And when you turn the biggest correction in years into a big payday, you’ll understand why I so fervently believe that there’s always a place to make money…
And why the market catalysts I refer to as Disruptors are the key tools to find those big paydays… over and over again.
See you later this week.
[Editor’s Note: We encourage you all to “like” and “follow” Shah on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and then bank some sky-high profits.]
Ask me to name the greatest retail product to ever come out of Wall Street and I’ll point to exchange-traded funds – better known as ETFs.
ETFs are great for lots of reasons, but mostly because they are supreme Disruptors.
Their introduction in 1993 disrupted the staid, overly hyped, unnecessarily expensive, inefficient, self-serving and much-too-opaque mutual fund industry.
Besides being financial-sector Disruptors, ETFs are extraordinary personal Disruptors. And as I’ll be showing you in the months to come, whenever you find a spot where two or more Disruptors/catalysts converge, you’ve also identified your biggest Extreme Profit opportunities.
Today I want to show you how to employ this Disruptanomics “one-two punch” to your maximum personal advantage.
It will uncomplicate your financial life by establishing a foundation for your Extreme Profit investments.
And that will set you up for Extreme Wealth.
We’ll set you up for all of this… one step at a time…
Why I Dig ETFs
Let me start by openly admitting my bias: I love ETFs… even more than I’ve always disliked conventional mutual funds.
That “bias” is actually a big part of the reason I view ETFs as such a foundation for meaningful wealth.
During my time as a professional trader, you see, I would never place my money where I couldn’t see what someone was doing with it, where it was expensive to park, or where I couldn’t – during market hours – turn my shares into cash when my indicators told me it was time to “take cover.”
In describing all those shortcomings, I’ve just described conventional mutual funds.
Lots of investors own mutual funds – because that’s what they were “sold” for many years by the industry that tried to enslave them.
The upshot: Those fund holders have no concept about how badly they’re being exploited.
Most mutual fund are way too expensive. Some also have sales charges and exit charges (called front and rear “loads” in broker parlance) and so-called 12b-1 fees and transaction charges.
Unless it’s an index fund, you’re only told what’s in your mutual fund portfolio every quarter – and even then there’s a 30-day time lag. With mutual funds, it’s possible to lose money on your investment and still have to pay capital-gains taxes.
And there’s the whole price-realization-uncertainty thing: Even if you sell a fund early in the trading day, you’re still going to get that evening’s closing price. That doesn’t do us a damn bit of good if we see the market slipping – and sell – only to have stocks plunge a few thousand points afterward.
No thank you.
Anatomy of a Winner
You have none of these issues with ETFs.
(I did detail some pricing issues in a report I shared last week, but those issues were limited to major “down” markets. And let’s face it: In a market that bad, you’ll have problems with investments of all types – not just ETFs.)
Exchange-traded funds are just better products.
ETF expense ratios are, on average, about half those of most managed mutual funds. According to Morningstar, the average expense ratio on a managed mutual fund is 1.42%. On an ETF, the average is 0.53%… but on most ETFs, the expense ratio is closer to 0.40%.
With ETFs, you know what’s in the underlying portfolio. Almost all ETF sponsors have product websites where you can see what’s in the fund portfolios. Even “managed ETFs” – which trade in and out of stocks – have to post their holdings every day.
You will have capital gains when you sell your ETFs – if you bought them at a lower price. So you won’t get socked with a capital-gains tax bill if you haven’t sold them, which happens too often with mutual funds.
Most important, for me, is that I can sell my ETFs any time during the day and know what price I’ve gotten. Sometimes you can trade ETFs before and after hours if there are buyers or sellers on the other side of your trade when the exchanges are closed.
There are all kinds of offerings but one basic theme.
There are more than 1,500 ETFs in the market. Another 150 are introduced every year. Not all ETFs that make it to market live forever. More than a few die off every year – for different reasons – but mostly from lack of investor interest in them.
What makes the great majority of ETFs so valuable is that most of them are basically indexed products.
And they’re indexed in unique ways.
There are baskets of stocks, or futures, or bonds, or derivatives – or hard assets, such as physical gold – which make up underlying portfolios and represent an industry, an asset class, a country’s stock market… or even fixed-income securities of different yields, risk profiles and maturities. Whatever the underlying “stuff” is in the portfolio, an ETF gives you specific exposure to what you want to trade or invest in.
The best examples of ETFs being mostly indexed products are the major market benchmark indexes. Those three ETF products are, in my professional opinion, the most important for investors and traders.
The “Big Three”
Although there may be different ETF products that track the same benchmarks, the ones that have the most assets under management – meaning the biggest, most-liquid ETFs that have huge daily trading volumes – are the ones you should look at.
They’re always your best bet.
The best ETF to track and trade the benchmark Standard & Poor’s 500 Indexhappens to be the first ETF ever introduced – the SPDR S&P 500 Trust (NYSE: SPY), which made its debut back in 1993.
With $176 billion under management, SPY is huge. It’s also liquid – trading an average of more than 144 million shares daily. And it has a microscopic expense ratio of only 0.09%.
That makes it a winner in my book.
The best ETF to track and trade the Dow Jones Industrial Average is the SPDR Dow Jones Industrial Average ETF (NYSE: DIA). DIA has $10.89 billion under management, trades more than 7 million shares a day and has a 0.17% expense ratio.
The best ETF to track and trade the tech-focused Nasdaq Composite Indexis the PowerShares QQQ Trust Series 1 (Nasdaq: QQQ). QQQ controls $38.32 billion, trades an average of nearly 40 million shares a day and has a 0.20% expense ratio. QQQ is more than 60% technology stocks, with Apple Inc. (Nasdaq: AAPL) making up about 13% of its total weight.
Starting out, as everyday trading vehicles – as a way to invest long term in the market or as a hedge against falling stocks – these big benchmark index “stocks” are my go-to ETFs.
When I watch the market, I watch the Dow first (because that’s the index most news shows talk about and it’s the one the typical investor is the most in tune with), the S&P 500 second and the Nasdaq third. These benchmarks are the U.S. market in most everybody’s mind. They’re all different, but all important.
Because the easiest and cheapest way to play the market – for you and for institutional money managers – is to buy one of these ETFs (depending which stock index you are interested in), they are super important to watch. I watch and trade all three ETFs.
I’m a big-picture trader. Because I trade a lot of money, the most important thing to me is being on the right side of the market. These three indexes and ETFs are “the stock market” to me – and to the money managers who trade U.S. stocks.
If you are on the right side of the market, it’s hard not to make money. The simplest way to make money is by buying one or all three of these cheap ETFs… when the market is going up. As a trader, that’s what I do. And if I don’t believe the trend will continue to go higher, I’ll sell.
And if I think the markets are headed lower, I’ll short these three ETFs.
The Simple Things…
Making money really is simple if you don’t complicate things. That’s why these ETFs, in particular, are so valuable. You’re watching the market and trading the same thing you’re watching. There’s no disconnect.
While there’s no disconnect between watching the market and trading an ETF that tracks it, ETFs can face intraday pricing disconnects when any of the underlying stocks or futures that make up the portfolio stop trading for any reason. I wrote about that last week and offered a solution.
Trading these big ETFs is easier than trading any stock because you’re trading the market. And the market is a lot easier to understand (as a giant entity) than a single public company that has products, management and all kinds of “firm-specific” issues – including how its stock trades relative to other stocks in its industry and relative to the market.
Trading individual stocks is great, and, of course, I do that.
But there’s nothing easier than trading the market. That’s what I do most and make the most money doing.
If you want to make a lot of money and set yourself up to trade a lot more stocks a lot more successfully, start here. I promise you’ll become a much more profitable investor.
We’ll trade these ETFs together from now on. I’ll tell you exactly what I’m looking at, what I’m seeing and how to make the same trades I would make.
This will serve as a foundation for other “Extreme Profit” trades that I’ll ferret out for you. In fact, having this base will make it easier to identify these other opportunities.
In the investment markets – the portions that affect you and me – exchange-traded funds (ETFs) have emerged as the ultimate market Disruptor.
The first ETF debuted back in 1993. But those funds really came into their own in the past dozen years. During that stretch, in fact, ETFs have displaced regular mutual funds as the investment of choice: The amount of money ETFs hold has skyrocketed more than 2,000% – compared with a paltry 120% for regular funds.
This massive shift is due to more than investor fickleness. ETFs trade all day like stocks – making them better than mutual funds. There are more than 1,500 of them, according to ETF.com. There’s an ETF for almost every industry, index, asset class and risk-exposure play you can think of.
ETFs are modern-day magical trading tools.
But if you know anything about magic, you know there are times where the trick goes awry.
The hat lacks the rabbit.
The woman in the box actually does get cut in half.
The same types of tragedies can befall ETF investors. It’s rare. And it’s not intentional – it’s just what happens when the magic trick doesn’t work… as millions of ETF investors and traders just found out the hard way.
Here’s what happened, what’s going to happen again and a strategy that will protect you – without having to “cash out” and hide yourself on the sidelines.
And back here, I’m going to show how to make the ETF magic work for you… as long as it holds.
In short, I’m going to give you the best of both worlds…
A Thousand Below
On the morning of Aug. 24, all hell broke loose in ETF land.
The “magic box” didn’t work.
Before the open that morning, stock-market futures indicated the Dow Jones Industrial Average could open down 1,000 points. Almost all stocks that opened traded down.
A lot of those stocks were temporarily halted when they reached “Limit Up/Limit Down” levels. Lots of stocks didn’t open near the time they should have. Against that backdrop – throughout the morning – futures prices were swinging widely and triggering their own halts.
This magical breakdown created a wicked problem for ETFs.
An ETF is actually a portfolio of stocks, futures, bonds or other financial instruments. On a typical trading day, those “underlying” instruments change hands with no hiccups.
But if any of those ETF holdings stop trading, are halted or experience pricing problems, it’s impossible to accurately calculate the net asset value (NAV) of the ETF.
That happened a lot on Aug. 24. In fact, 327 separate ETFs were halted for at least five minutes that day. Eleven were halted more than 10 times that day, according to TD Ameritrade Holding Corp. (NYSE: AMTD).
While the halts are a problem if an investor desperately wants to get out and can’t – or the ETF reopens a lot lower – what was worse was that ETFs kept trading… even though some of their underlying holdings seized and stopped trading.
The prices of the ETFs that kept trading collapsed. That’s because the “market-makers” – the big-firm traders that ETF sponsors hire to keep their funds trading – suddenly didn’t want to do the job they were hired for.
These traders – technically known as “authorized persons” – didn’t want to buy ETF shares from sellers at a bad price and then have to sell them lower at a worse price, losing a hefty amount of money in the process.
A Major Mismatch
How ETFs are created and redeemed is a magic trick itself. A “sponsor” – BlackRock Inc. (NYSE: BLK), for example – hires a trading desk to create ETF “units,” or shares. It does that by snapping up the underlying shares in a big enough quantity to make the ETF come to life.
When there are a lot more sellers than buyers for a particular ETF – meaning the total assets of the fund decline – the authorized participants sell all the underlying shares in the portfolio and redeem (wipe out) excess ETF shares. That’s how ETFs get smaller in size, when shares are redeemed.
That brings us back to that August morning. Investors were furiously selling ETF shares – and stocks were being halted or not opening at all. That meant it was impossible to accurately price the ETFs.
The authorized participants knew they would have to redeem a lot of ETF units – even as they kept trading and making a market for them… widening the “bid” and “ask” spreads on those funds.
ETF share prices collapsed.
For instance, even though the Standard & Poor’s 500 Index fell as much as 5.4% at one point, the PowerShares S&P Low Volatility ETF (NYSE ARCA: SPLV) fell 46%.
It recovered as the day went on.
If you were one of the investors who sold your SPLV at the market low that morning, only to see it bounce back for purely mechanical reasons, you’d be hurting.
In fact, you’d be downright sick.
That happened a lot that day.
Holding the Magic
Now you know what happened.
And know that it can happen again. That it can happen any time there are mispricing issues – or outright halts – in the stocks or bonds held by any ETF you own.
Until the U.S. Securities and Exchange Commission (SEC) figures out what to do about it – or the ETF sponsors figure out a solution – you could be the “lady in the box” when the ETF magic is killed by a steeply falling market
There is a move you can make, though.
You can change your “market stop” orders to “stop limit” orders.
If you do this – and prices collapse way below where you have market-stop-loss order – at least you won’t get the worst price. That’s because a stop-limit order gets you out of your position if your stock or ETF trades at, or below, your designated limit order, but gets you out at the limit price you’ve designated.
Of course, that’s not a perfect solution to the problem. With a stop-limit order, your stock could trade below your limit and not ever come back up to your limit where you’d get out.
Using a stop-limit order only helps you if the ETF is so badly mispriced that it falls way below where it otherwise should be trading and then bounces back after all stocks are opened, all halts have been lifted and hopefully your price recovers in the process.
Of course, that’s not the only way to protect yourself – and profit – from ETFs’ bad magic. I’ll have some more tactics and plays to make soon.
At the beginning of today’s column, I called ETFs the “ultimate market Disruptor” – but they might be nothing compared to what could be coming up later this week.
Yes, I’m talking about Thursday’s U.S. Federal Reserve policy meeting – and the interest-rate decision that comes along with it.
Now, with the Aug. 24 mini-crash so close behind us, I doubt Fed Chair Janet Yellen will raise rates. But if and when she does – even if it’s a year or more from now – the Disruptor will be huge.
Coming soon, I’ll have ways to play that decision… no matter what the Fed does.
Back in the go-go 1980s, Japan was the economy every investor respected – and feared. Wall Streeters even had a saying that reflected this, telling investors, “When Tokyo sneezes, Wall Street catches a cold.
Fast-forward 30 years. Asia has once again become a global economic linchpin. But now it’s Beijing – not Tokyo – that has investors feeling alternately awed… and fearful. That mix of emotions is exactly why so many analysts refer to China as a “dragon” as part of their financial and economic analyses.
The recent meltdown in China’s stock market has caused shockwaves that have been felt throughout the global markets. It’s the first time investors have seen this, so there’s no precedent that helps them understand what’s happening… or to know how to respond.
In this brand-new video, Wall Street Insights & Indictments Editor Shah Gilani explains what’s happening, shows why it matters – and even shows what to do about it.
We can’t stop what’s happening in China. But we can blunt its impact.
And with the information and insights Shah provides in this video, you’ll be able to declaw the dragon – at least as far as it pertains to your investments.
Make no mistake about it: The stock market crashed last Monday.
And it was terrifying.
It was frightening.
Stocks bounced on Wednesday and Thursday, with the Dow Jones Industrial Average gaining back more than 1,000 points.
Now investors want to know: Was last Monday’s doubling over a below-the-belt hit?
Was Tuesday’s cheap shot just a phantom blow?
Was the rally back Wednesday and Thursday an “all clear” signal?
Was Friday’s action indicative of anything?
Here’s the truth about last week, what’s going to happen next and what you should do…
Setting the Scene
Let’s look at the market conditions heading into last week.
Stocks had been weak. It had been hard to tell from the sideways action exhibited by the major averages, but beneath the headline numbers more than half of all stocks were trading below their 50-day moving averages.
Indeed, even before Monday’s tumble a lot of stocks had dipped below their 200-day moving averages.
While being above a 50-day moving average (the average price a stock has been trading over the past 50 days) is a positive sign – and falling below a 50-day average is a warning sign – share prices breaking below their 200-day moving average is a flashing red light.
Red lights are now everywhere.
There had been profit-taking toward the end of the previous week. That tipped the balance between investors thinking we would break higher from the sideways trend and investors who saw lackluster action as a reason to take profits off the table.
With bulls and bears facing off in this sideways market, the backstory had become China.
Economic growth in China has been slowing, and Chinese stocks had been getting killed. When U.S. investors woke up last Monday morning and saw the Shanghai Composite Index down 8.5%, they panicked.
Speculators, sensing the market’s weakness going into the previous weekend and seeing Chinese stocks collapsing before U.S. markets opened last Monday, shorted Standard & Poor’s 500 Index futures at a furious pace. Institutional money managers didn’t hesitate to jump on the bandwagon. Before markets opened, the futures rout indicated that the bellwether Dow Jones would open more than 1,000 points down.
And that’s what happened. At the open, the Dow dropped more than a 1,000 points, for the first time in history. But what really happened was worse.
Last Monday’s market plunge started out as a story about China, but ended up being about the mispricing of exchange-traded funds (ETFs) and mutual funds, and stop-loss orders getting triggered when they shouldn’t have been. It’s about how high-frequency traders have turned exchanges into casinos, how the markets are truly broken and how it’s only a matter of time before they implode and take the economy down with them.
But the bottom line here – the real bottom line – is that is all about you and your money.
Markets are tired. Stocks are weak. That’s the backdrop.
There’s no good news anywhere. The U.S. had an upward gross-domestic-product (GDP) revision indicating 3.7% growth for the second quarter, but the economy grew at an annual rate of only 2.2% in the first half of the year.
Europe is slipping backward again. China is sinking in quicksand and could turn monstrously ugly. Japan is foundering. Oil and commodities are depressed and telling us there’s no demand… no growth anywhere.
Against such a moribund backdrop, when stocks collapse – establishing new lows below their 200-day moving averages – and then bounce, it’s those new lows that traders and investors fear.
And they should fear them.
All those lows that stocks and markets just made now represent the path of least resistance. Any and every bounce we experience – if they don’t end up being “consolidating moves” from which stocks can go higher – are nothing but ledges that stocks can fall from to test those lows.
That happens. It’s not technical mumbo jumbo, or tea-leaf reading.
And that – market psychology – is what technical analysis is really about.
Investors see new lows and recognize them for what they are: levels stocks fell to because investors panicked and sold there. If a stock or market looks like it’s weakening, investors who saw new lows and still own stocks – or who bought near those lows – face the fear that since selling created those lows before, anyone holding stock above those levels would consider selling before stocks work themselves back down to those levels.
It can become self-fulfilling.
Even scarier is the investor psychology that festers around these new lows – a sentiment of “What if they don’t hold?”
If new lows can be made, and they always can be, then there’s no known bottom, other than the next support levels below the last lows.
That’s where we are right now. The path of least resistance is back down to those lows.
I’m not trying to scare you. I’m trying to prepare you.
But what if I’m wrong? Maybe this panic will pass and we’ll move higher. In which case I’ll have covered your backside and tell you the coast is clear and it’s time to load up.
But if I’m right, and I am most of the time, you’re going to need a plan. As for that claim of “being right” – sorry, but I have to boast a bit here: I called this last sell-off, and we just closed out six triple-digit winners (each one of them a good bit more than 100%) on downside trades we had just put on in my Short-Side Fortunes newsletter.
So keep it simple.
Charting the Market
If markets bounce higher from here – and the jury’s out on that happening – the first thing you need to know is where the market’s “support levels” were… and if those support levels held.
That means you have to employ a bit of “technical analysis” – to look at charts and establish where support was and if markets didn’t hold support. And if none of those levels held, how low did stocks fall?
Then, because markets are more important than stocks – because even the best stocks fall from the weight of crashing markets – you have to know where all the support levels were for all your individual holdings and how low below support they just went.
The reason support is important for the markets – and for your stocks – is something I refer to as the “horizon line.” (I call it a horizon because when you draw your support lines they are usually straight horizontal lines.) That’s a place where stocks have come down to before – usually several times, in fact – only to bounce higher from there. The psychology of this is important, because investor psychology is what technical analysis is all about.
When investors see stocks approach support levels, several things can happen. Some investors might see it as a chance to add to existing positions. Others might view that level as a good point to create a new position – expecting support to hold and stocks to rally.
If support gets broken, it becomes scary for holders of the stock. There’s now a good chance that investors might dump their positions – reasoning it’s safer to sit out the selling they now believe could follow.
That horizon/support line is also the line where traders – a group that sometimes includes me – will test shorting the stock or market because we know if support gets broken, and sellers dump stocks there, we can make money being short.
Support lines are the single-most-important technical analysis tool in everyone’s toolbox. If you have zero interest in technical analysis (a big mistake, in my opinion), at least watch your support horizons.
The reason you have to know how far below stocks and markets fall once “support levels” are breached is this: Very often, the newly established low becomes the path of least resistance that shares will fall back to if stocks attempt to rally – only to sputter and fall backward again.
Take a look at the accompanying Dow chart.
Notice the first horizon/support line at 17,500. We broke that. Then we broke through the next major support at 17,000.
Now look at the new low established at 15,370. That’s now the path of least resistance – until the market gets back above the old support horizon of 17,000, and then above 17,500 very quickly after we get above 17,000.
Down is now the path of least resistance because those two old support lines are now the Dow’s first and then second “resistance lines” – the “ceiling” the Dow has to break back above for investor psychology to improve.
If resistance is pierced, investors feel like the selling is over. The markets are in better shape because they bounced back through resistance. The coast is clearer, so to speak, and getting back in is now worth the risk.
A Path to Follow
If we go higher – but don’t break through resistance (we may not even get close to it) – I’m recommending you add downside plays (shorts, put options or inverse funds that gain in value when stocks fall) to your portfolio. I’m also recommending you look to hedge your individual stock positions if you’re sticking with them.
Consider buying some put options on those positions. Remember, puts will get cheaper if stocks bounce higher.
On the other hand, if markets fall, puts will become increasingly expensive as more and more investors rush to them for protection. (And if you bought those puts when they got cheaper as markets rallied, you’ll really gain as those options rise sharply in value as markets careen lower.)
I’m telling you to do this for a reason. At many of those pivot levels, you’ll often see long investors try and make shorts cover and push stocks higher. Sometimes that works as some of those short players panic and cover their positions.
But if there’s no follow-through after any of these upside pops, you know there are no real buyers – meaning we’re headed right back down.
On any of the new downside positions you’re going to put on, use a 10% stop to get out if we get a huge rally and have to reassess our plans.
Some good downside positions to consider buying include “inverse ETFs” like the ProShares Short QQQ (NYSE: PSQ) and ProShares Short Dow30 (NYSE: DOG). These inverse plays will give you protection – and profits – should markets fall.
If stocks sell off hard, don’t be afraid to use market orders to buy into these inverse ETFs. Once you have your position, use 10% stop-loss orders to get out of the way if there are any crazy updrafts like we saw last Wednesday and Thursday.
Let me know if this is helpful, or what else I can do to help you navigate this stretch… in case market shadows grow darker.
After Monday’s and Tuesday’s frightening downdrafts, many investors are panicking.
While he has a plan for his readers to stay calm and make a comeback, Shah had words of warning during his latest Varney & Co.appearance… “Enjoy this rally while it lasts.”
Despite the recent rally, Shah told Fox Business viewers that we’re not out of the woods yet. Find out how fragile he thinks the market is – and what you need to do to protect yourself – in the video below.
It’s no surprise that U.S. stocks have dropped into a free-fall mode.
I’ve been warning about the risks that stock, bond and other financial-asset prices face for some time.
Now that it’s happening, though, you need to understand these two things.
Exactly what’s happening…
And what you can do about it – both to blunt your losses… and to make money.
In fact, while other investors are panicking – and see gloom and doom – I see opportunity.
This morning’s market plunge underscores my long-held mantra: “There’s always a place to make money… always.”
Today I’m going to show you a couple ways to put that mantra to work – so you can cash in…
Forgetting About the Fed
The big, big picture that too many investors lost sight of was that the U.S. Federal Reserve‘s “zero-interest-rate policy” (ZIRP) and massive quantitative-easing (QE) moves didn’t stimulate economic growth.
And it didn’t work when the European Union (EU), Japan and China tried this strategy for themselves.
What all that easy liquidity did do was lift asset prices – which, in the case of the Fed, was also an articulated policy goal.
In the Fed’s “wealth-effect” scenario, consumers would feel better about the economy’s prospects (and their own) by watching stock prices rise.
Aided by the Fed’s cheap-money tailwind, U.S. companies over the last six years helped their own cause with $2.7 trillion of stock buybacks. That boosted Corporate America‘s all-important earnings-per-share (EPS) metric (since the same earnings total is apportioned across a lower number of shares).
That additional boost of corporations buying their shares at ever-increasing prices and better earnings metrics made stocks look better and better to the untrained eye. And that created a “virtuous momentum” market where stocks were pushed to increasingly higher “highs.”
While other countries were following the Fed’s lead, China not only lowered interest rates but embarked on a debt-fueled stimulus tear – including runaway infrastructure spending.
According to McKinsey Global Institute research, China’s total public-and-private debt burden skyrocketed from less than $7 trillion in 2007 to more than $28 trillion by mid-2014.
Despite this, China’s GDP growth rate has been slipping badly.
For a couple reasons …
First, there were low interest rates that have been diverting investment capital and savings into capital markets – chasing stocks and increasingly lower-yielding fixed-income securities. Then there was China’s stimulus efforts to boost infrastructure, manufacturing and exports.
These two factors led to overproduction and the stockpiling of commodities. And they brought us to the point we’re at today.
That’s a big, big picture I just painted, of course. But beneath that, mechanical realities were signaling trouble.
The price of oil has been sliding. When the price of the most important commodity in the world skids precipitously, it’s not just because America’s new record production of 10 million barrels a day is tipping the supply side of the equation.
And it’s not that other producer countries desperate for revenue (which is another indication of trouble) are pumping furiously.
The price of oil – that critical bellwether – is crashing because global demand hasn’t been rising as much as before… because global growth is slowing.
That’s been a flashing light.
Then there’s Greece. It’s been a great 28-century run, but the “Hellenic Republic” is probably on its last legs. That’s another warning sign – not just about Greece, but about the burden of debt in general.
There’s no way Greece can pay the more than $350 billion it owes, and that’s just in bailout loans.
There’s no way Japan can repay its government’s $11 trillion in debt, which will be three times Japan’s GDP by 2030.
The United States is no slouch in the debt department either. Globally, debt burdens have been climbing higher.
And that takes us back for a moment to the big, big picture: By slashing interest rates, central banks are engaged in a scheme to cut the financing costs of the rising debt loads of each of their respective governments.
The only escape route out of everyone’s debilitating debt spiral is for economic growth to accelerate (that’s, of course, what everyone had hoped low interest rates would accomplish). Accelerating growth would boost the tax revenue needed to help pay down debt. And it would also fuel inflation, which reduces the cost of the debt.
That’s why central banks want inflation. But there is no inflation – which is another crystal-clear signal of trouble.
Then there’s China. The saying used to be, “When the United States sneezes, the world catches a cold.”
That’s now true of China. And China is sneezing, hacking, loading up on NyQuil and taking three days off work.
Beijingtried to push stock markets higher by cheerleading them on through party papers and TV shows.
Millions of new brokerages accounts have been opened since the end of 2014, and Chinese “speculators” have been lavished with margin to buy into the nation’s hot stocks.
The central planners had hoped to get China’s debt-ridden corporations – especially the state-owned and controlled entities – to be able to issue new equity to new stock investors. The goal: To offload balance-sheet debt onto stock-market “plungers” – a Wall Street euphemism for market players that make big-and-reckless bets.
Beijing’s plan didn’t work. When Chinese stocks crashed, that was another giant warning light signaling trouble ahead.
There’s just no good news left to lift stocks higher. There’s no market leadership from any industry, other than the brief momentum runs made by some tech darlings and a bunch of hot biotech companies that are promising next-century solutions to yesterday’s problems.
And there’s even another challenge looming: The Fed says it’s leaning toward raising interest rates.
How to Run the Table
All these signals were flashing yellow, then bright red in the past few weeks.
We caught them all in my Short-Side Fortunes trading service and are very short and very, very happy, because we are short China, oil, Europe and all the U.S. stock indices.
I’m looking for an oversold bounce at some point, but if we get one on thin volume, it will be a chance to just load up for the next downdraft.
There’s nothing holding markets up anymore. It’s truly frightening.
Central banks have shot their ammo. Their bazookas are smoking… and empty.
What the markets need now is a good, long flushing-out. Not that I want to see that, even though we are short, but that’s what they need to squeeze out excesses built into artificially inflated stock-and-bond prices.
It’s not too late to capitalize on this opportunity… to hedge against further downside moves, or to make money if stocks fall more – as I believe they will.
Because puts are now so expensive, the best way to hedge and the best way to profit from any further selling would be to buy “inverse” exchange-traded funds (ETFs) like ProShares Short Dow30 (NYSE Arca: DOG), or ProShares Short QQQ (NYSE Arca: PSQ).
We own both in myShort-Side Fortunes service, and they provide great short exposure to the big U.S. indices.
As sure as this sell-off was clearly signaled, there will be signals when we’re near the bottom.
We’ll continue to follow stocks down.
And we’ll be there for you when they’re ready to rebound.
Peer-to-peer lending, or P2P as it’s known, is a juggernaut financial-services Disruptor.
But thanks to its supercharged growth, P2P lending has attracted the attention of regulators and other financial-market overseers. They’re scrutinizing this new form of lending from multiple angles – fearing it may be too disruptive for its own good.
The U.S. Treasury Department, the Consumer Financial Protection Bureau, financial services regulators, bank and finance company lobbyists and, most recently, the U.S. Court of Appeals for the Second Circuit are weighing in on P2P lending.
There’s a lot at stake here…
For borrowers in love with lending platforms that give them access to money that would otherwise be hard – even impossible – to get.
For private lenders who loan money to borrowers at above-average rates.
And for the owners of sites that match lenders and borrowers for a fee, including investors in publicly traded ventures like LendingClub Corp. (NYSE: LC).
There’s even more at stake for the stock market and the economic health of the country.
The issues aren’t complicated, but tackling them will be.
As we’ve said before, P2P lending is one of the biggest new developments in the world of finance.
But you don’t want to take a wrong step.
Here’s what you need to know to avoid getting caught on the wrong side of the tracks if this Disruptor train gets derailed…
When Banks Aren’t Banks
While Disruptors can upend the status quo in any industry, not every disruptive business model plays out as their creators plan.
That’s especially true when the industry being disrupted – in this case, financial services – is one the most powerful sectors in the world.
Banks and formerly successful consumer-finance companies weren’t initially concerned about P2P lending when the new lending barbarians, led by Prosper Marketplace Inc., opened up in 2006.
Of course, 2006 led into 2007, which was the beginning of the end for a lot of banks and consumer finance companies.
While traditional lenders struggled to stay open during the credit crisis and through the Great Recession, P2P lenders honed their business models and extended their reach globally.
Today, P2P lenders are a growing threat to banks and consumer finance companies trying to reestablish themselves. The traditional lenders have unleashed their lobbyists to undermine P2P lenders before they get much bigger than they already are.
According to research from Morgan Stanley (NYSE: MS), marketplace lenders – that’s what P2P lenders are calling themselves now – are expected to account for more than 8% of consumer-unsecured loans and 16% of small-business lending by 2020.
Here’s the knock on marketplace lenders by their more traditional competitors.
Marketplace lenders are non-banks that don’t directly issue loans, that don’t keep any credit risk on their books after they match up borrowers and lenders, that use small Federal Deposit Insurance Corp. (FDIC)-insured specialty banks to facilitate their banking services but don’t pay into the FDIC safety-net fund, that don’t have lots of assets or capital, that add leverage to the economy, and that generally act as banks but don’t have the regulatory burdens of banks.
Constituents and lobbyists are bombarding legislators, asking them to look into these issues. And, in turn, those legislators are prodding regulators and the Treasury Department to step up their game.
On July 16, the Treasury Department issued 14 questions for public comment. The preliminary information-gathering inquiry on marketplace lenders and lending practices asked market participants for comments on:
The different models used by marketplace lenders and how these models may raise different regulatory concerns.
The role electronic data plays in marketplace lending and the risks associated with its use.
Whether marketplace lenders are tailoring their business models to meet the needs of diverse consumers.
Whether marketplace lending expands access to credit to underserved markets.
The marketing techniques utilized by marketplace lenders.
The process marketplace lenders use to analyze the creditworthiness of borrowers.
The relationship between marketplace lenders and traditional depository institutions.
The processes marketplace lenders use to manage certain client operations, including loan servicing, fraud prevention and collections.
The role the government could play in effecting positive change in the marketplace lending industry.
Whether marketplace lenders should be subject to risk retention rules.
The harms that marketplace lending may pose to consumers.
Factors that investors should consider when making investment decisions.
The secondary market for loan assets originated in the peer-to-peer marketplace.
And whether there are other key issues that policymakers should monitor.
The Consumer Financial Protection Bureau (CFPB) is looking into the marketplace for consumer loans and what protections borrowers have.
Even the U.S. Securities and Exchange Commission is looking into P2P lending. Both in the funding process and when loans are purchased from sites and packaged, securities are created. That’s the SEC’s beat.
The real threat P2P lending poses is to the economy, which is only now coming into focus thanks to lobbying efforts to bring it to everyone’s attention.
The truth is, this financial services Disruptor could upend the economy and should be closely scrutinized.
The Economy Problem
There are three fundamental and alarming problems with the P2P lending model.
First, lending sites aren’t banks. Instead of relying on a stable deposit base against which loans can be made, marketplace lenders originally relied on peer-to-peer (meaning person-to-person) matching, where a private lender agreed to fund a borrower’s loan request and each paid a transaction fee to the platform provider.
There’s very little P2P anymore. Institutional investors such as hedge funds, private equity shops, insurance companies and even bank subsidiaries are raising short-term funds in the capital markets to buy up huge quantities of platform-generated loans. Regulators worry about their ability to roll over their short-term borrowings to continue to fund consumer loans if capital markets experience anything akin to 2008, when they ceased up entirely.
Second, most consumer loans are unsecured loans made to individuals who are consolidating higher-interest loans. Any prolonged economic slump would devastate the ability of borrowers to keep up with debt-service payments. And because there’s no recourse on unsecured loans, it’s easy for borrowers to simply default.
The effect of cascading defaults on marketplace loans would cause lenders to cut off funding, further choking consumers who, under present growth rates for marketplace lenders, are increasingly likely to turn to these non-bank or even “shadow bank” lenders.
Third, without access to bank loans, because they’re being shunned for marketplace loans that have different credit-profiling techniques, consumer spending could come to a standstill and squeeze the entire economy.
These are legitimate concerns that are only now being addressed.
Whether or not the Treasury, SEC, CFPB or other regulators apply heat to marketplace lenders and their Disruptor model, P2P lenders may be disrupted sooner rather than later by the U.S. Supreme Court.
The U.S. Court of Appeals for the Second Circuit recently overturned a lower court’s ruling that allowed “appointees” of banks to charge high rates in any state regardless of where the appointee itself was located. The Court of Appeals overturned that ruling in Madden v. Midland Funding LLC, saying essentially that any issuer of a loan that isn’t a national bank has to abide by each state’s usury laws.
Marketplace lenders use small banks to facilitate the actual loan-making process, and those small specialty banks have been bypassing state usury laws.
Midland Funding is trying to take the decision of the Appeals Court to the Supreme Court to get it reversed. If there is no reversal of the Appeals Court’s ruling, the marketplace lending business model itself will be seriously disrupted.
Investors in LendingClub Corp. who aren’t aware of the Appeals Court’s ruling may be wondering why the shares they hold have dropped 30% since the beginning of June. Now they know.
The slippery slope that the great P2P Disruptor model is facing should give investors pause. Until there’s more clarity on the profitability of marketplace lending going forward, venturing into a marketplace lender like LendingClub should be done gingerly – at best.
For investors ponying up funds as private lenders on platform sites, a good look at the direction of the economy is mandatory. Making loans in good times doesn’t count for anything if hard times befall borrowers who can easily default.
For my money, the great Disruptor of financial services is being given a run for its money, and I’m anxious to see how this Disruptor might get disrupted itself.
[Editor’s Note: We encourage you all to “like” and “follow” Shah on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and then bank some sky-high profits.]
In a market stuffed with price-shifting financial “Disruptors,” the proliferation of “activist investors” is a front-and-center catalyst we’re going to follow and cash in on.
We’re addressing activist investors today because one of the biggest noisemaking players in the biz is back in the news with his latest move.
I’m talking about Bill Ackman, the billionaire hedge fund manager who runs Pershing Square Capital Management LP. With $20 billion in assets under management, Pershing Square is an activist investor in publicly traded companies. And it was a top-performing fund last year.
Ackman’s latest target is Mondelez International Inc. (Nasdaq: MDLZ), a packaged-food giant and spin-off from Kraft Foods Group Co. with a $76 billion market value.
Unlike most spin-offs – which, as a group, tend to be market-beaters – Mondelez has frustrated analysts and investors by underperforming. Although the stock has accelerated a bit of late, the fact is that since the 2012 breakup, Mondelez shares are up only 20% – versus 50% for the Standard & Poor’s 500.
Companies like this are prime targets for activists like Ackman, former corporate raider Carl Icahn, Nelson Peltz or the late Kirk Kerkorian.
Investors of this ilk take big stakes in moribund or cash-rich companies and lean on management to make changes – pushing the “C-suite” execs to slash costs, boost buybacks or launch or raise dividends.
Investor activism is increasing.
That makes it a Disruptor that’s capable of generating meaningful wealth.
But you have to pick the “right” activist stock.
As I’ll show you today…
Activists Show You the Money
A 2012 study by London-based research firm Activist Insight found that mean annual net return of more 40 activist-focused hedge funds outperformed the MSCI World Index in the years following the 2008 global credit crisis.
In fact, activist investing was the top-performing strategy among hedge funds in 2013. Firms using that strategy generated average gains of 16.6% – nearly double the 9.5% average return of other hedge-fund players.
Remember, those are just averages. If you pick the “right” activist target, you can generate extreme profits. As I know myself.
Back in July 2013, for instance, I went on record and recommended Apple Inc. (Nasdaq: AAPL) at a point when many investors were writing off the iDevice King as a company whose best days were behind it.
I knew better.
Just weeks after my public recommendation, Icahn launched an activist campaign against Apple, using social media tools like Twitter and “open letters” to CEO Tim Cook as his “weapons” of choice.
The cash-rich Apple ended up enacting a dividend program and launched into aggressive buyback mode. It also generated stunning results with iPhone launches and a long-term commitment to an “ecosystem” strategy that will keep the company on a growth path for a long time to come.
From a split-adjusted recommendation price of $60.10 a share, Apple’s stock soared as high as $134.54, for a peak gain of 124%.
That’s a great result for any stock – but especially for the mega-cap shares of the most valuable company in the world.
And this story underscores the massive profit potential that comes with choosing the “right” activist stock.
Mondelezmay not be a “right” stock. Sometimes the best trades are the ones you don’t make.
A Mouthful of Trouble
Ackman’s Pershing Square grabbed a 7.5% interest in Mondelez, worth $5.5 billion.
That’s a really big target to take down and digest. And the challenges facing Mondelez are also serve up some food for thought…
Although the company owns some great brands – like Oreo cookies, Trident gum and Cadbury chocolate – and has a big position in developing markets, Mondelez was supposed to be a high-growth proposition. It just hasn’t played out that way.
Consumer tastes have been changing. Given Mondelez’s product lineup of biscuits, cookies, crackers, salted snacks, chocolates, gums and candies, powdered beverages and coffee, I’m not convinced the firm is focused on growth areas.
The results bear this out. Mondelez’s categories saw growth slow from 6% in 2012 to less than 4% in 2013 to a wheezing 2% last year. In its most recent earnings report, per-share earnings fell 30.6% on a 9% drop in revenue.
So I’m not inclined to piggyback on “Ackman the Disruptor” on this one.
The principal reason is that I don’t believe you can make enough money on this trade for the risk you’ll be taking. I’m not convinced that if a buyer for Mondelez emerges the buyout price will represent enough of a premium over the stock’s current market price (which happens to be pretty close to its high) to make it worth my while.
It’s different for Ackman because he bought lower, used a ton of leverage thanks to options and forward contracts and stands to make a great return if the stock goes up between 10% and 20%.
A 20% return would be a great result for a short-term trade. But there’s no guarantee that will happen. Add in the attendant risk of the stock slipping back if no buyer emerges – or the fact that I might have to tie up my capital and hold onto the position for a long time, while additional value is created by Ackman and management – and you can see why a follow-on Mondelez trade isn’t for me.
But if you want to take a shot at this, here’s how I would play it.
I’d buy the stock here at around $46.25, and I’d buy the December $46 puts for about $2.45.
That way I can participate on the upside if a buyer comes in and be mostly covered on the downside if the stock falls back from now until the puts expire in December.
If a 20% premium bid for the company were to emerge here, the stock would go to $55.50.
The position I created would cost $48.70 – $46.25 for the stock plus the $2.45 per share for the puts. So I’d make $6.80 per share, or 13.95%, on my position.
Of course, the stock could go higher and I’d make more.
But it could go down, too.
If the stock falls, I’m covered and my loss would be limited to the difference between the price I paid for the stock – $46.25 – and the “protection” I get by owning puts with a strike price of $46. That amounts to a 25-cent-per-share loss, plus the cost of those puts of $2.45, for a total possible loss of $2.70 per share.
Risking $2.70 to make an unknown profit – but maybe $6.80 or more per share – isn’t my idea of a good piggyback play on account of the unknowns and what I can do with my capital elsewhere.
There are lots of Disruptor plays – many with activist investors – that are a lot better than the way this trade sets up.
The beauty of all those Disruptor opportunities is I’ll be telling you about them right here.
My colleague Michael Robinson – director of Venture Capital and Technology Investing here at Money Morning – also discusses disruptors often.
The ones he shares with his readers, of course, are mostly in Silicon Valley.
And just recently, he uncovered another tech market in Silicon Valley- and it offers windfall profit plays that dwarf those you can find in the Nasdaq and the NYSE. This “other” tech market is a playground of the rich – and it’s inhabited by the top venture capitalists, private-equity players and so-called “high net worth” investors.
That’s why Michael put together this short presentation to help explain this exciting new venture capital “partnership” to you all.