Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Prepare to Profit From the Next Stock Market Crash

Stock-Markets / Financial Crash Sep 27, 2011 - 07:14 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: The notion of a stock market crash is a terrifying thought for most investors.

But it shouldn't be. After all, stock market crashes, properly played, can be just as profitable - if not more so - than bull-runs.


Of course, the trick to profiting from stock market crashes is predicting them.

That's where I can help. You see, a relatively simple analysis shows that the Dow Jones Industrial Average has gotten ahead of itself. More than that, it's giving a pretty clear signal about where the blue-chip benchmark is headed.

Let me explain ...

A Market Mismatch
Despite any recent losses the stock market is still extremely high by historical standards.

Remember, it wasn't so long ago - February 1995 - that the Dow first passed 4,000. That was thought to be a pretty high level at the time, as it was almost 50% higher than the 1987 peak.

The Dow closed yesterday (Monday) at 11,043.56, which is inconsistent with economic growth prospects.

That is, nominal gross domestic product (GDP) in the second quarter of 2011 was up 105% from the first quarter of 1995. So if you assume that the stock market over time should follow national output, then a middling level for the Dow today would be about 8,200 - more than 2,500 points below the present level.

And keep in mind that that's a middling level - not a bear market.

If you want an idea of how far the Dow might slump in a bear market, you can take the 777 at which the index stood in August 1982 - before the great bull market began - and inflate it by the progress of GDP since then. If you do that, you get a bear- market target of about 3,600 for the Dow.

Incidentally, a few years ago I met Kevin Hassett, the AEI scholar, who along with James Glassman wrote a book in 1999 called "Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market." He's a very nice guy. I made a bet with him that the Dow will reach 3,600 before it gets to 36,000. He's teased me about it since saying I lost my chance, but it looks as though I may get him yet.

A Matter of Motivation
The stock market may be significantly higher than it was in 1995, but I assure you our economy is no better off.

In 1995, we were just at the beginning of the great Internet boom. The federal budget was moving towards balance, helped by a wind-down of military spending after the collapse of communism. And the Federal Funds rate was at 6% -- safely above the inflation rate of 2.9%.

From this investment perspective, things couldn't have gotten much better.

But look at where we are now. Our technology "boom" consists of a few flimsy social networking websites. The federal budget deficit was $134 billion in August pushing the shortfall for the fiscal year to date to $1.23 trillion. And the Federal Funds rate has been at a record-low range of 0.00% to 0.25% for almost three full years, while inflation edges steadily higher.

Indeed, it's not the economy that has driven the stock market higher. Instead, it's been three other factors:

•First, ultra-low interest rates together with increased leverage have inflated corporate profits.
•Second, modern communications technology has enabled multinationals to profit from low-cost global sourcing.
•And third, money -supply expansion - with the St. Louis Fed's broad money MZM up 262% since 1995 compared to GDP's 105% increase has inflated all asset prices. Most notably housing prices in the middle 2000s, Treasuries and gold today.

How to Profit From the Stock Market Crash
That's where we've been - here's where we're going.

Interest rates must eventually rise to prevent inflation and the de-capitalization of the United States through low savings and capital outflow. This will raise the cost of capital compared to labor, putting millions back to work, so it doesn't necessarily mean we'll see a double-dip recession as a result.

Capital returning to the United States will slow growth in emerging markets. It will also put an end to the multinationals' outsourcing bonanza. You can already see pressure on profits in the financial sector, and that pressure will soon spread to the entire economy.

A stock market crash will accompany this process, but a major U.S. recession won't. The Dow will almost certainly test the middling valuation of 8,200 and there's even a chance that it will slide towards 3,600.

But again, that will only snuff out the weaklings, leaving us with stronger investment prospects and a healthier overall economy.

Winston Churchill in 1925 said that he wanted to see "finance less proud and industry more content." In 2012-13, he may get his wish - and for those who suddenly have new job opportunities, it will seem not a moment too soon.

Actions to Take: For investors, the advice is clear.

Emerging markets remain a better bet than U.S. stocks, since their markets in general are less overvalued. However, to take advantage of the likely U.S. stock downturn, the best bet is out of the money S&P 500 put options, traded on the Chicago Board Options Exchange (CBOE).

Buy the longest- dated contract possible, to give the downturn time to play out. For example, the December 2013 600 contracts (CBOE: SPX1321X600E) currently are trading around $40. If the full bear market scenario were to play out by December 2013, the Standard & Poor's 500 Index would presumably trade around 400, giving at least a fivefold profit on these options.

Don't put more than 4% to 5% of your portfolio in this: Being an option, its value decays with time, but as a hedge to your overall stock position it's unbeatable.
[Editor's Note: Back in mid-August, Martin Hutchinson timed a stock recommendation so investors could lock in a 13% yield.

Two weeks ago, he uncovered a stock with a dividend payout of better than 14%.
Then on Sept. 13, he told investors about one stock that featured a 10% payout, and a fund that was about to make two payouts - a dividend payment and a capital-gains distribution.

If you're a subscriber to Hutchinson's Permanent Wealth Investor advisory service, that's the kind of performance you can expect. Find out more by clicking here.]

Source : http://moneymorning.com/2011/09/27/prepare-to-profit-from-the-next-stock-market-crash/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in