Investor Who Predicted The Stock Market Correction Offers An Update

Sep. 01, 2015 12:39 PM ETBAC, DIA, META, GLD, GPRO, IWM, NUGT, OIL-OLD, QQQ, SPY, UUP, VTI, VXX42 Comments

13.12K Followers

Summary

Before I left for vacation 13 days ago, I warned investors of imminent market correction and suggested raising cash, avoiding stock purchases & buying volatility protection.
While I went long the market at the first trough last week and profited from bets then placed on the dollar and on stocks, I'm now preparing for another decline.
This correction and eventual recovery will be U-shaped (not V-shaped), as it is due to the market environment on Fed concerns and capital flow factors, not specific catalysts.
The volatility instruments I used (VXX calls) paid off extremely well for me but are now expensive due to broad market interest in them currently.
I'm now using new instruments to guard wealth and actually profit from the environment.

In the last few reports authored before I left for my vacation roughly two weeks ago, I presciently advised investors to: avoid new stock purchases even on dips in the market; move heavily to cash; and to hedge risk with a volatility instrument. I fended off some criticism in the article comment section to the last of those suggestions, but as a result of my own bet on risk, I turned an important percentage gain last week as most investors saw portfolio values decline sharply. I hope my followers also benefited from my advice. With consideration for my near 6,000 followers, I thought an update would be appropriate at this critical juncture to advise investors of how I'm thinking about things now and what I'm doing and preparing to do next.

When you make a statement like I have in the title to this article it's important to provide some supporting evidence. Here are my recent reports that preceded and forewarned of the market sell-off:

August 18: Minefield of Risk (Recommended preparation for imminent market correction)
August 13: Investors Dilemma - Do Not Blindly Buy the Dips Any Longer (As market rallied, suggested investors avoid purchase due to imminent correction)
August 12: One Security to Save us All (Recommended purchase of VXX volatility investment instrument as a hedge against market correction)
August 10: The Herd is in a Hurry to Get Butchered (Again advised investors not buy a rally and to expect volatility in the weeks ahead)
August 9: Warning on Stocks - Keep Your Powder Dry (Warned of risk and suggested investors go to higher levels of cash)

It's important to note that I shifted my perspective early last week to advantage from the lower price levels of securities. Critically, I went long the dollar since the trough marked last week and have seen good gains there. Currently, I also have new positions in place against the risk of another market downturn, which I believe is again imminent. Though, at this point, I'm using different securities to advantage from it, as price premiums have risen in volatility instruments.

My forecast for market correction was realized over the last couple weeks. Stocks benefited last week, though, from the supportive statements of New York Fed President William Dudley on Wednesday, the strong upward revision to GDP reported Thursday and the calculated and diplomatic statement of Fed Vice Chair Fisher in his Friday interview on CNBC. These positive factors supported and confirmed my own shift to a risk on stance. But we are not through with volatility yet friends. In fact, if not for Fisher's interview Friday, I believe stocks would have sold off as investors would have avoided carrying risk into the weekend considering the Vice Chair to the Federal Reserve addressed the Jackson Hole Symposium Saturday.

Risk Remains

The factors behind the market stir remain in place into the September Fed meeting, and now tangible broad-based investor fear joins the slew of potential catalysts for further crisis. This is evidenced by the price premium surge in stock options around market ETFs and volatility instruments. Still, the days and weeks ahead will present both upside and downside profit opportunity to capitalize on or to navigate around depending on your risk preference, and I intend to help you do that.

5-Day Chart of SPY at Seeking Alpha

That's what a correction looks like up close. Doesn't look so scary does it? It's much more dramatic from ten thousand feet or as illustrated by a longer term chart. However, the 5-day chart of the SPDR S&P 500 (NYSE: SPY) here depicts the misery many of you went through. The SPY was down 11.1% from its close of $210.56 on Monday August 17 through its close on Tuesday August 25 at $187.23. It's been quite fast and dramatic, as well as consistent with how market corrections go.

Since stocks turned lower, I've heard and read about every possible reason why they did so. Followers of mine are well aware of the real reasons for it all, and I've grown tired of presenting them, but for the sake of the new reader and as a reminder to the loyal few, I'll do it one more time.

"This market is like a powder keg now sitting too close to the fire, and each news catalyst is simply an ember."

First of all, do not focus too much on the catalysts that media and market mavens alike casually call to blame. Sure China matters, and yes the snap Greek election announcement was troubling news, as are cascading energy prices. However, the truth is that the problem is more about the market environment today brought about by the Federal Reserve's plans, and it's also being fuelled by the seasonal shifts of capital flows more than any specific catalyst. This market is like a powder keg now sitting too close to the fire, and each news catalyst is simply an ember to set stocks ablaze.

I indicated after the last Employment Situation Report (for July) that the environment for stocks would be treacherous through August, September and possibly October. I now believe the brunt of the damage is more likely to be fully felt by the close of the September Fed meeting or shortly thereafter. The last jobs report and Fed meeting minutes release were relevant enough to investors to raise higher the specter of concern for a September rate action.

It's natural for investors to fret such a shift in monetary policy, given the relevance of higher interest rates to the cost of capital to corporations. If the cost of capital increases, the threshold for economic value creation is raised, and corporations must produce greater returns on investment simply to maintain the same level of value creation. Economic value creation is in turn critical to market value creation, and so equity investors are right to worry about the pending action. Their worries have been allayed now some by the upward revision to GDP, which offers justification for higher interest rates.

The market can accept higher rates if the economic situation justifies it. This will likely be what gets us through monetary tightening, though I do not expect it to be given its due credence until sometime in November or December. Until then, the cross currents in economic data due to energy sector stumbling blocks in America create concern. After then, though, capital flow factors weighing against stocks also go away (more on this coming). Before the GDP data, worries about a slowing China and its impact on energy demand and the global marketplace had enough investors worried about the possibility of a mistimed Fed rate lift-off to stir volatility. There is not a high level of confidence in the Fed's ability to forecast economic activity, and so investors tend to micromanage the wall of worry. And now even, it is taking the consoling words of voting FOMC members to stave off a second leg lower.

There's also the issue of capital flows. This is the time of year for many institutional fund managers to close their books for their fiscal year. With an eye toward performance, which plays a critical role in the acquisition of new investment capital (how they survive), portfolio managers can get quite defensive at this juncture. It lends to seasonal volatility. When you throw that in with an inflection point in Fed monetary policy you get the perfect storm for stocks.

Thus, the catalysts that are always with us tend to get a greater reaction from markets. A minor spat between North and South Korea might not have equity investors fretting before a Friday close otherwise. Neither would a Saudi Arabia troop movement rumor about Yemen trouble energy markets as much as they did Friday - the iPath S&P GSCI Crude Oil ETN (NYSE: OIL) was already off its lows on an inventory draw and strong GDP revision, but some traders were indicating the Saudi troop issue was a factor Friday nonetheless. The snap Greek election announcement stirred concern because some investors not in the know might have feared the possibility of a non-compliant new Greek leader unraveling all the good work accomplished between the EU, IMF and Greece this year. But none of the issues, not even China economic slowing, would matter as much as they do now given the Fed inflection point and the capital flow factor.

"...that is how alpha is best sought and actually discovered."

I owned call options on the iPath S&P 500 VIX ST Futures (NYSE: VXX) volatility instrument ahead of the correction I saw coming, and I advised investors to do the same in my report, One Security to Save us All, linked to above. I fielded a good amount of criticism for that contrarian view, but that is how alpha is best sought and actually discovered. It takes a lot of conviction to make that sort of a bet given the VXX tends to lose money due to the costs of its maintenance and while betting against a typically rising stock market. Today, similar securities like I used to my benefit are significantly costlier to purchase, and so the significant percentage gains I booked are harder to come by now via the same instruments.

Stocks are Indicating a Sharp Drop Today and Gold is Surging

Sector Security	Tuesday Open
SPDR S&P 500	-2.0%
SPDR Dow Jones (NYSE: DIA)	-2.0%
PowerShares QQQ (NASDAQ: QQQ)	-2.0%
iShares Russell 2000 (NYSE: IWM)	-1.5%
Vanguard Total Stock Market (NYSE: VTI)	-2.0%
SPDR Gold Trust (NYSE: GLD)	+0.7%
iPath S&P 500 VIX ST Futures ETN	+9.4%

What I'm Doing Now

Until last Thursday afternoon, I was long the SPDR S&P 500 , but no longer hold that position due to risk I see near-term. I've been long the dollar via the PowerShares DB US Dollar Bullish (NYSE: UUP), but I've recently added a hedge against my bet using UUP puts, given the volatility present today and near-term risk against my long. This market correction and eventually recovery will not be V-shaped, but rather U-shaped, because of the environment that is behind its cause. Investors should have significant cash ready to buy favored stocks at discount when further correction strikes. Three of my favorites discussed often via my column here at Seeking Alpha are GoPro (NASDAQ: GPRO), Facebook (NASDAQ: FB) and Bank of America (NYSE: BAC), each of which have their own risk spectrum. I'll be writing about them and more in the near-term.

This week is covered by the dark shadow of Friday's scheduled Employment Situation Report. I see no way the data could be seen as good, and recommend investors prepare for a second market decline that may already be in progress. I expect it would lend to aggressive selling Friday and Monday, if fear does not drive it ahead of the report. If the jobs data is in line with economists' expectations or better than them, investors will again anticipate a Fed rate hike and sell stocks. If the data is short of expectations, investors will sell stocks in fear of China economic contagion. I've added a long position in the Direxion Daily Gold Miners Bull 3X ETF (NYSE: NUGT), though I suggest investors instead use the SPDR Gold Trust for a more reliable hedge. I also have my hedge against my dollar long bet for protection against a market correction that could infect the dollar if it is spurred by weak economic data. And I'm seeking to take a short position on the iPath S&P GSCI Crude Oil TR ETN today, though not to be held long-term. Long-term equity investors willing to bear potential significant near-term downside should be rewarded for patience again toward the close of this year and start of 2016. For my market recommendations, please see my profile at Seeking Alpha to follow the column.

This article was written by

Markos Kaminis

13.12K Followers

Markos N. Kaminis generated a 23% average annual return on "Strong Buy" stock selections over 5 years while working as a Senior Equity Analyst on Wall Street. As an internal whistle-blower, I sacrificed absolutely everything to do the right thing. And despite being an eyewitness and victim of terrorism on 9-11, I am currently volunteering at a busy border crossing helping Middle Eastern & North African refugees, most displaced by war or other horrors, to land safely in Europe. Despite my life experiences, I still have hope, and believe that we must persevere with patience (forgiveness), tolerance and love. I have determined to struggle for the better good of my brethren rather than for myself, and you'll see that play out over the course of the rest of my life. But I worked far too long and hard to become an excellent stock-picker to not incorporate this work into the fold. Markos N. Kaminis generated a 23% average annual return on "Strong Buy" stock selections over 5 years and ranked 2nd among a group of 60 analysts in-house as a Senior Equity Analyst over a seven-year period at Standard & Poor's. After proving his value in-house, he was promoted into a special role as an idea generator, supporting the portfolios of institutional clients as well as driving performance within S&P's recommended lists and portfolios. At times, Markos was responsible for up to 10% of the firm's entire "Strong Buy" list and is due a great deal of credit for the group's outstanding performance during his tenure. Markos followed a group of 30-40 Small and Mid-Cap firms, and was charged with finding new buy and sell candidates across industry sectors. He generated a 23% average annual return over five years on his "Strong Buy" recommendations, and 26% over three years ended 2004. He was ranked 1st of 60 analysts in-house for his "Strong Buy" performance over 4 years (2nd over 5). Markos also authored IPO research and wrote for high-level newsletters, The Outlook, Equity Insights and Emerging Opportunities, as well as for BusinessWeek Online. He represented his firm as an analytical expert commentator for major media, including television, Internet and through quotes and interviews in reputable publications. Besides predicting the stock market correction of 2015 through a series of prescient reports here in August. (see proof here: http://seekingalpha.com/article/3482226-investor-who-predicted-the-stock-market-correction-offers-an-update ), Markos also advised investors to buy stocks at the bottom of the market in mid-February 2016 and again post-Brexit at the trough, and to buy gold in January 2016 before the commodity started its move higher. More recently, he called the pickup in the economy for 2018, the upward move for stocks in 2018, and the breakout in oil, starting in June of 2017. See: June 15, 2017 – Buy Oil Back Now; August 1, 2017 – Why Oil Prices Will Break Out – The Demand Driver; September 30, 2017 – Why Oil Prices Can Break Out Part II: Vulnerable Supply; and January 26, 2018 – Up 44% Since Our June Bullish Turn – Oil Still Supported Here. While not perfect, over the years, Markos has made countless correct market and security calls for his followers, including forecasting the demise of J.C. Penney on the heralded CEO hire's disruptive plans, the bankruptcies of Washington Mutual and Pilgrim's Pride in the $30 and $20s, respectively, as well as the purchase of Facebook in the mid-$20s when it was considered a pariah post its IPO (today it is a market darling). Markos also warned of the real estate market collapse and the financial crisis in the early days of his blogging. What I personally want you to know about my plans: After witnessing the worst of Wall Street firsthand and having the ideal vision of my childhood career choice corrupted by reality, I almost switched to full-time charity work at age 40 and still have plans for several non-profit endeavors. The future is somewhat unknown, and I am open to employment offers for portfolio management or other ideas. While continuing to publish regularly, I expect to begin work on several book ideas that I believe are important for business, for our nation and for society. I may put my stock selection skills, earned through blood, sweat and tears, to better use, and to make my own way. I would like to give investors something rare, a dignified partner who can manage money with integrity and a clear conscience about the degree of due diligence behind investment decisions... someone who cares more about your money than your wife. I hope readers will become followers of my column here & at my blog, so that when our numbers are substantial, we might start an investment fund or two. Prior to his Wall Street career, Mr. Kaminis spent time in the back-office, as a mutual fund accountant, where he managed for a time the work of two men. Before this, from age 11 to age 25, he worked as a carpenter's apprentice and carpenter with his father, in both commercial and residential projects. Mr. Kaminis has an intimate knowledge of the real estate (undergraduate degree in Real Estate and Finance) and construction market, as well as the restaurant industry. However, as a generalist stock analyst, he showed the ability to learn any and the most complicated of industries in short time - and he gamed every challenge presented to him. Mr. Kaminis earned his MBA at the Katz Graduate School of Business at the University of Pittsburgh, and his BA at Temple University in Philadelphia. However, Markos has been studying the stock market since age 13, when he determined his career path. He made his first investment at age 16, and funded much of his undergraduate education with the proceeds of his investing success. Mr. Kaminis continues to keep busy forecasting the economic path and securities market activity. Markos is considering the eventual start-up a long/short capital appreciation hedge fund. Such a fund would limit risk through beta reduction, using a diversification strategy targeting sector & industry and long & short position inclusion. At the same time, Markos' theoretical fund would seek maximum capital appreciation through the exploitation of Mr. Kaminis' inherent economic & market discernment gift and proven stock selection skills. Mr. Kaminis also has a team of a select few analysts, technicians, strategists and economists that he has been impressed by over the years, which he expects to tap for the project when the time is right. Mr. Kaminis welcomes your interest in such a potential forward effort, and looks forward to discussing his plans with those appropriate and within legal constraints. Markos toys with very early stage entrepreneurial efforts in the testing of certain business models, all of which he intends to tie to a planned non-profit project serving the most helpless among us. The tie will be that the businesses will give employment opportunity to individuals who would otherwise have difficulty finding gainful employment. It will house and heal the homeless, ex-convicts, those completing rehabilitation efforts for drug and other addictions, and others in need of help. Markos is currently Directing the widely syndicated blog he founded, "Wall Street Greek," and is writing for other well-known publications besides advancing several big ideas. Markos' column is syndicated across sites like the Boston Globe, Kiplinger Magazine, UPI and other reputable newspaper and TV websites, as well as private networks, Amazon Kindle, iPhone and more. In the past, he has written for RealMoney.com, Motley Fool and others. Requests to research specific companies are welcome, as we serve our readers. You may contact us via this blog's contact info. Mr. Kaminis welcomes you to follow him here at Seeking Alpha, where he is proud to be a long-time contributor to this strong team of writers. He considers the Seeking Alpha team and management close friends, and for you, people worth knowing and following. Visit his site: Wall Street Greek (http://www.wallstreetgreek.blogspot.com/)

Disclosure: I am/we are long UUP, NUGT, GPRO, BAC. 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.

Additional disclosure: I'm also short OIL, and have minor hedges (short positions) against my long positions in UUP & NUGT due to expectation for volatility.

Investor Who Predicted The Stock Market Correction Offers An Update

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