Tags: Days | Away | stock | Drop

We’re Days Away From a Big Stock Drop

By    |   Monday, 26 Mar 2012 09:49 AM

Get ready to buckle up! The road ahead for the stock market is about to get volatile within the next 60 to 90 days. How do I know?

We can look to the Volatility Index (VIX), often referred to as the "fear index" or the "fear gauge." It measures the put and call option activity on the S&P 500 to see when the market has gotten overdone to the upside.

In my opinion, it’s a leading indicator of what’s to come because a reading in the 14 to 15 area coincides with a huge market correction within 60 to 90 days afterward typically.

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Then when the VIX spikes up above 40-plus and eventually begins to peak out and head lower. It’s at that time when we’re about 30 to 90 days from the next stock market rally.

So why am I writing this to you right now?

The VIX is around 14. That means retail investors have gotten complacent because we haven’t had even one major stock market correction in 2012 yet. They’ve only seen the market go up and any mild dip was worth buying. So why should things change, right? Wrong!

That’s why I love the VIX. It tells you when the party is close to being over in the near-term on the upside and the downside in the market. Right now, it’s pointing to a major stock market correction coming within the next 60 to 90 days (or sooner).

Knowing this is coming … it doesn’t mean “sell all the stock you’ve got and go to cash.” But what it does mean is that if you’ve got some huge profits you want to hang onto, you might want to sell some of your position in it.

You also might want to lift your stop-loss levels on your positions. You also might want to raise some more case for the correction to come so that you can buy some shares after the huge dip is over.

But there are other ways to play this coming stock market correction too. For instance, when the VIX closes above 18 and thus breaks its downtrend line, you could buy a put upon the Aussie dollar ETF. Or if you trade in the forex market, you could simply short AUD/USD when this all begins to unfold.

Buying an inverse commodity ETF could be another alternative since commodities, being seen as a risk-on asset, tend to sell-off along with stocks during these huge dips.

It should also be noted that after these huge stock market dips are over that some of the quickest “bounce backs” that happen are in commodities like gold, silver, oil and copper but also in commodity-currencies like the Aussie dollar, Canadian dollar and New Zealand dollar.

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So, there are many ways you can “play the VIX” when you see that it’s calling for a stock market correction due to its “ultra-low” reading.

Therefore, you’ve been forewarned of the next correction to come.

Now it’s up to you what you do with it. There are plenty of things to short or buy puts on or buy inverse ETFs on. Or you can simply sell or trim some positions and buy some more shares once the dip is over.

You can do this with stocks but you’ll usually find that you get an even better result by doing it with commodities or foreign currencies that benefit greatly when stocks bounce back…these tend to bounce back even more!

But whatever you do, get ready for it. Think about what to do ahead of time … not when it’s all unfolding. That’s what the masses will do. That’s a recipe for bad decision-making in times like that. Prepare ahead of time and you’ll find that dips aren’t something to be feared but rather opportunities to be seized upon.

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About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.

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2012-49-26
Monday, 26 Mar 2012 09:49 AM
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