Don’t Just Count on a Crash – Bank on It

6 | By Shah Gilani

Make no mistake; there’s going to be a stock market crash.

But that doesn’t mean you shouldn’t be in the market. You absolutely should be.

In fact, being fully invested makes sense. Markets don’t crash without giving investors a warning.

Despite the fact we’re now more prone to a 1987-style crash than ever, there are strong reasons why you should be invested.

Being on the sidelines while stock markets are regularly making higher highs is a loser’s game. Sure, the market can crash, but what if it goes up for another five years and you’re still waiting?

Here’s what the warning signs will look like, and how you can make a quick fortune on the next crash…

How to See a Crash Coming From a Mile Away

No one knows when this raging bull market’s going to top out, turn, or crash. And no one should worry about it.

If the market tops out, there’ll be plenty of time to take profits and position yourself for whatever’s coming next. If the market turns down, it won’t happen quickly, and you’ll have plenty of time to position yourself for whatever’s coming next.

The only thing to be concerned about is a crash because when the market crashes, it happens quickly.

But even that won’t happen without warning.

Every major market crash (the panic of 1907, the 1929 crash, Black Monday in 1987, the 2000 tech wreck, and the 2008 crisis) gave investors plenty of warning.

Personally, I had a great day on October 19, 1987. I got completely out of the way of the tech wreck after riding it up, had sold everything, and started shorting stocks in September 2008.

Bubbles are easy to spot, everyone sees them. It’s just what you do about them that matters.

The question today is, are we in a bubble? The answer is NO.

All the historical valuation measures of stocks and markets point to them being fully valued, and that doesn’t mean they’re overvalued or anywhere near bubble territory.

The domestic and global macro view of economic growth is positive. In fact, it’s very positive, relative to the past decade of sub-par GDP growth.

With the U.S. and most of the world growing again, there’s plenty of room for corporate earnings to improve. Even though stocks may be fully priced, accelerating growth will pad corporate revenues and earnings and keep them from becoming overvalued, and enter bubble status.

The big companies leading markets higher, the tech darlings, and industrial multinationals are all capable of expanding their market share and profitability.

When investors look at those companies objectively, they see their extraordinary growth potential and are willing to pay up for their earnings potential. That means earnings per share by multiple measures are high for most of the leading companies, but justifiable if they continue to expand their profitability.

With growing earnings, stocks aren’t going to suddenly roll over.

There’ll have to be a catalyst, typically an external catalyst, as there always has been preceding a crash.

External catalysts today could include war breaking out with North Korea, a nuclear device being detonated somewhere, a sovereign debt default, a cyber-attack on critical infrastructure in the U.S., or something that threatens business and commerce.

The buildup and unfolding of a catalyst can usually be seen from a distance and allows investors time to react.

Instead of Panicking, Get Profiting

Of course, investors should always have a plan to take profits, limit losses, and unwind positions quickly when warning bells go off.

I’m always looking for catalysts, but I don’t panic when I see one or two starting to erupt. I always have stop-loss orders in place on my positions.

The only thing that matters with stop-loss orders is that you get back into your positions as soon as the coast’s clear. Sudden panics can correct themselves quickly, and being left on the sidelines is a waste.

More often than not, I get back into positions I’ve been stopped out of at a higher price than where I got taken out. Giving up a few dollars or a couple of percentage points in gains to get back into position isn’t a big deal, it’s a smart way to play.

If I don’t like how the market’s reacting, like if it’s weak and there’s been enough selling to warrant my concern and there’s a catalyst behind it, I will sell everything.

However, I don’t wait to sell everything to start putting on positions to profit from a possible crash.

While I’m getting stopped out, which is happening for reasons I can see, I’ll start to put on positions that will make me money if there’s going to be a crash or a long downturn.

If the market continues to struggle, I’ll add to all my downside plays and look to put on new ones.

One way I play a crash for big bucks is by buying out of the money puts on leveraged index ETFs like the ProShares UltraPro QQQ (NYSEArca:TQQQ) and ProShares Ultra S&P500 (NYSEArca:SSO). Buying out-of-the-money puts before things become unglued gives you tremendous leverage – and potentially huge profits – in a crash.

I don’t like buying calls on inverse ETFs because I don’t trust the makeup of many of them. Just because an inverse ETF is supposed to go up in price when the market falls, doesn’t mean it won’t come unglued itself and not behave the way it’s expected to.

If an ETF comes unglued, it’s going to go down, not up in price. That’s why I buy puts.

Still, I’ll look for cheap, out-of-the-money calls on the VIX whenever it falls below 10, and have my buy orders ready to send on a moment’s notice.

If there’s a crash coming, I want to make a lot of money on it. But I won’t wait on the sidelines in the hopes that I’ll be able to avoid it completely.

I just know what to do if I see one coming.



6 Responses to Don’t Just Count on a Crash – Bank on It

  1. Pushme Pullyou says:

    Hmmm. I concur that some of the potential is not over valued. However, as you often state… we are in a retail ice age. And there are stocks that we could certainly buy for less, or not at all. Can we find the best or perhaps the true value? Conversely, there are many undervalued stocks on the market which are good buys.

  2. Clinton “Tim” McCool says:

    Yes I need to know. I need to semi retire for health reasons and cannot Afford to do so on the small nest egg I have accumulated without generating income from it. My investing history is like a nightmare. Always on the wrong end off the trades and invariably losing money. I need to change it.

  3. Jacob C O says:

    I can see some movement of bubble forming. How can anybody predict when the bubble is going to burst. 2008 I had observed in 2007 itself. But it took almost 9 months to explode the bubble.

  4. Jonathan says:

    This was an absolute useless article in terms of actionable items. It gave arguments for both sides (bull and bear) while agreeing that there’s a possibility for a crash. Then it says you can predict it but does give indicators (what’s an external catalyst?)… I’ll tell you what – I believe that when the market starts to turn downward and people have no idea why, this should be the first inkling of a crash… I also think this Thursday (11/8) was the beginning of it since NO one really knows squat and in each of the downtowns: 1929, 1987, 1999, 2008, the move that followed was so fast (like 7 days) that no one really knew what to do – they were paralyzed, and thought “Oh, its over”… and eventually week after week, until like 3 months later, it tanked like 40%. Reasonably priced? I think that’s not a good reason, stocks and securities are priced due to what the market is willing to pay for them, not based on reason. Its based on psychology and demand – no demand, no price. Period. Be careful people, keep at least 50% cash in your portfolio.
    I think reading zerohedge is more enlightening. Godspeed to everyone.

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