September 11, 2015
Attention: Prepare for the
Next Market Storm Now
By Amber Hestla
The bull market lasted more than five years. Then stocks traded sideways near their all-time highs for a few months. Suddenly, the S&P 500 fell around 20% within a few weeks...
You might think I'm describing the recent market action, but I am actually talking about 1962. What happened then is eerily similar to what's going on now.
The initial decline in stock prices came in the spring of 1962 (Point 1 in the chart below). Market historians blamed President Kennedy and his interference with capital markets.
At the time steel companies and the steelworkers' union were in negotiations, but the two sides were unable to compromise and a strike seemed likely.
With a possible work stoppage in the cards, steel companies increased production and manufacturers stockpiled steel. This would allow the steel companies to continue operating through a strike. They also decided to raise prices so they would have a cash cushion.
Kennedy didn't like this and instructed government officials to visit company executives at their homes to express his displeasure while he made a speech about corporate greed. Steel companies rolled back the price hikes, but traders became nervous about the unprecedented level of government intervention during peacetime and stocks sold off.
As the chart below shows, there was a quick bounce, but it was followed within a month by another low (Point 2 on the chart). But the final bear market low came in October (Point 3) and was driven by another news story: the Cuban Missile Crisis.
Once it became clear in October that peace would prevail, a new bull market began and the S&P 500 gained more than 80% over the next 40 months.
I believe we are likely to see a repeat of the 1962 stock market pattern. It won't be exactly the same, of course, but I am looking for a lower low in the major market indices. The recent recovery off the late-August lows could be driven by investors buying the dip and hoping for a continued bull run, or by traders covering short positions.
This time could be different but, in my opinion, we are unlikely to see a real recovery in stock prices for at least a few months. Either way, my investing strategy won't change -- even in a bear market. There will always be undervalued income opportunities if you look in the right places.
How I Plan to Profit From Fear in the Market
I actually thoroughly enjoy times like these because that's when readers of my premium advisory, Income Trader, and I pocket bigger income checks...
When traders become spooked and bearish headlines dominate the news, this translates into a surge in the VIX.
The VIX measures the implied volatility of S&P 500 index options. When investors become scared, it typically goes up, which means that investors are willing to pay more to hedge their downside risk, or protect any gains. And I'm willing to take their money to buy their stock... but on my own terms.
I set the price I'm willing to pay for their stock, and in return, they pay me cash up front. I do this by selling put options.
Think of it like this. Imagine if home and auto insurance premiums fluctuated with the weather. If the weather is good, then insurance is cheap. But if there's a hurricane looming, then premiums skyrocket.
Now you could take the chance that a hurricane won't hit and not pay the sky-high premiums. Or you could hedge your bets and pay higher premiums to protect your personal belongings.
To extend the metaphor, the VIX is the market's way of measuring investor fear of potential devastation. It indicates whether investors are willing to pay more to protect their investments.
When I sell puts, I'm acting as the insurance company, but I'm very selective with which stocks I will "insure." The best insurance companies are masters of pricing in risk -- the good ones always make sure they come out on top. Along those lines, I won't pick stocks that are likely to be swept up in a metaphorical hurricane. Instead, I focus on the companies least likely to be affected so I can simply pocket the premium and move on.
Just like a good insurance company, you have to have good underwriting skills to know which stocks to "insure." And so far my "underwriting" skills have been spot on. In fact, I've closed 85 winning trades in a row.
For example, I recently told my Income Trader readers about a company that's deeply undervalued, generates $157 billion in revenue and has a forward price-to-earnings ratio of only 9.2 -- a company that I'm willing to "insure."
In return, my readers and I will instantly pocket anywhere from $70 to $700 with a click of a button in our brokerage accounts.
You can still reap the cash rewards from this stock today, along with many other companies my readers and I are "insuring." You only need to follow my simple "underwriting" tips -- which I've detailed in a simple eight-minute tutorial. To learn more, simply visit this link.
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