3 Moves To Make On The Verge Of Market Panic

by: Quoth the Raven

Trading at the beginning of the week caught a lot of people's attention, as the market and gold were both slaughtered on Monday. There is a small onset of panic that could be felt Monday, as traders are more and more starting to ponder how much time they have left for their long positions.

Here's how I see things heading, and 3 moves I feel that people can make to be successful in the coming months of the market, which I predict is about to make a big turn in the other direction.

1. The Bull Run is Over, Short the Market

Monday this week was our first taste; anyone else feel the palpable panic that's in the air? People are starting to ask questions about whether this bull run is over and all it's going to take now are a string of a few days together like Monday, and we're going to see people hit the exits like crazy. It has happened before and it will happen again -- soon.

Can't you feel it? Calling it instinct is semi-stupid with all the technical indicators and data we have, but it feels like we're starting to tiptoe over a frozen lake and are just starting to hear the first cracks of the ice. Maybe it was the mini-crash Monday. Maybe it's residual nerves from the horrifying events in Boston.

Folks, no bull market lasts forever, and to me the signs have never been clearer that the floor below us is about to give out. To think we can continue to move upwards the way that we have forever, especially in the wake of how we're diluting our currency, is simply foolish.

In fairness, this bull market has had a great run. Many people have made tons of money, but I'm fearing the people buying long of recent are going to be the bagholders; at least for a couple months to come. I wrote about this in an article on March 12th called "The End is Near: Why The Bull Market is Finished". Since then, the market has condensed and has failed to make another big move upward.

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I noted :

This diagram, although about a year old, gives a good snapshot into how long most bull markets last. As you can see, we're pushing the average and median with each day that goes by.

The next chart is also about a year old -- but it gets the point across. The returns this bull market have provided relative to the returns of previous bull markets are astronomical. It hasn't just been a "good" four year run, it's been a great one.

It is also worth noting that the volatility index ($VIX) is extremely low (hit a low under 12 today) and that low volatility isn't always a great sign. Just as it can be a sign of consistency when it's between 20 and 35 as it has been, the very low number could be signaling a major upheaval in trends coming and the tide turning on a much larger scale. The Central Banks have given the public the impression that stocks are untouchable and the market will never die down. People are pouring (sometimes borrowed) money into stocks. What could go wrong?

How You Can Invest This :

  • Buy puts against long equity positions you want to hold
  • Write calls against long equity positions you want to hold
  • Sell short a competitor to your long positions as a sector hedge [i.e. If you're long Chipotle (NYSE:CMG), short Panera (NASDAQ:PNRA)]
  • Buy inverse index ETFs like DOG, DXD, QID

2. Gold is Cheap, Buy It Now

Gold (NYSEARCA:GLD) was down 9% early this week commensurate with the panic that ensued on Monday. I wrote an article on why Goldman Sachs's downgrade of gold (one of the catalysts fueling this insane sell-off) was completely detached from reality. In my article, I stated:

"Sure," you'll say to me, "but doesn't it look like things are going to correct here of recent? Can't you see that the price looks as though it's going to fall through the floor now?"

My response to that is that we are at one of many smaller corrections and pullbacks until we continue upwards, similar to what we can see from the past:

Why So Many Analysts Insist Gold Will Tank

This is a non-complex issue that economists like to make it sound complex in order to further their temporary need for market stimulation. Anyone that tells you that the result of Nixon shock is any more complicated than supply and demand methods learned in an ECON 101 class is trying to pull the wool over your eyes. What I mean by that is that this is a far less complicated issue than many economists will have you believe. It has to do with the amount of money in the supply versus the finite, unchangeable amount of gold available worldwide.

So, the wool that Goldman could be trying to pull over your eyes here could be the same tactics used by analysts, market makers and hedge fund traders everywhere: create a trend and buy/sell the opposite into it. If you think Goldman could not possibly be buying gold on their very own downgrade and assumed corresponding price decline, then I have some real estate in Alaska I'd like to sell you. I'd bet dollars to donuts that the "waning interest" in gold that Goldman is citing could be as fabricated as the money we continue to print.

When volatility is skyrocketing and the market is starting to pull back and correct, we should be seeing gold continue to rise in value. This correction is a major buying opportunity for people looking to hedge and firm up their investments in equities.

In an age where demand is created from the Fed injecting money into the supply and events like the horrible tragedy in Boston earlier this week are occurring on a global scale more often than ever, the security of gold is simply a no-brainer buy at these levels.

How You Can Invest This :

  • Physically buy gold bullion and hold it
  • Buy into a gold trust like GLD
  • Buy a gold ETF like IAU
  • Purchase silver for fundamentally the same reasons SLV

3. Go Long Volatility, More of it is Coming

Early this week, the VIX spiked 40% and we can look for more of the same action in the weeks to come. This is time to pile into one of the ETFs or options that let you go long the VIX.

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After sitting at all time lows for a while, the VIX showed signs of life earlier this week on Monday's panic and sell-off. I expect the VIX back over 35 before year's end more than a few times.

This one year chart of the VIX shows how quickly we can move from the 40's down to the teens. We can move up just as quickly. I am counting on seeing the panic of Monday's trading again. Panic means volatility. It's really easy to say, "that'll never happen, we'll keep going up," but it's investors not in tune with reality that make those remarks. The not-so-cute facts of the stock market are that:

  • Panic happens
  • Bear markets happen
  • Corrections happen
  • Volatility happens

You need to toughen up and embrace that the market can be an unforgiving teacher. It is not all sunshine and rainbows in investing; look at the last financial bubble -- people were ruined.

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How You Can Invest This:

  • Buy ETP's that track the VIX, like UVXY and CVOL
  • Buy VIX call options
  • Buy call options for VXX or VXV


I know that nobody likes reading an article like this. Change always is met with resistance and it's much easier to live in a dream world where the market is always your friend and always goes up than to embrace the reality of the situation.

So, on the verge of the panic that I feel is about to set in, I have to ask: Will you be ready to make money off of it when it happens, or will you be, yet again, telling the story of how you were wiped out by the government created market bubble?

Are you tired of watching big banks and investors place massive bets with your 401k that you have no control over? Do something about it. Get yourself into the shark mindset on the forefront of the coming bear market, because the meek are eaten alive, and I wish that on no one.

Thoughts & prayers to all those affected in Boston earlier this week.

As always, best of luck to all investors.

Disclosure : I am not a stockbroker or financial advisor. I am a casual investor making casual observations for the purpose of discussion and open communication and analysis of companies and stocks. All articles are my opinion only and are not suggestions to buy or sell any equity, bond, option or other financial instrument. There are tons of unqualified people out there offering up financial advice and it's your responsibility to sort through the BS. You don't hit the button to fill my orders and I don't hit yours, so no whining or praising over stocks covered by me. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.