Anyone who knows me understands that I am by no means an end-of-the-world alarmist kind of guy. Consequently, you should believe me when I tell you that a U.S. stock market crash is distinctly possible for the first time in years. Simply put, there is tremendous downward pressure and unlimited risk in the market right now, and anything is possible, as a result. Of course, just because a market crash is possible, doesn’t mean it's inevitable.
The current market climate reminds me of my hometown of Miami during hurricane season. While there’s no guarantee a storm will come, failure to take the necessary precautions can result in property destruction, or even death.
The ingredients for a market crash are starting to appear more clearly. Other than counter-trend trades, there’s limited upside to buying stocks, but there is unlimited downside potential.
- Today's market carries more downside risk than it has in the last two years.
- A market crash is a highly possible event.
- Investors should capitalize on today's uncertainty by maintaining large cash positions and short-selling certain stocks.
Volatility on Route
In today’s market climate, we can expect to see some of the biggest rallies ever. Why? Because, historically speaking, the biggest and fastest market moves come within the context of an overall downtrend. Fortunately, we can use these inevitable rallies to our advantage by employing the following strategies:
1) Lightening up on any long positions
2) Shorting any underperforming stocks and sectors
In my opinion, preparing for a volatility is always a wise idea, in any economic climate. But ignoring today’s elevated risk, the likes of which we have not seen in more than two years, is irresponsible at best, and downright foolish at worst. And even if a crash doesn’t come to pass, we can still trade in a range for a while.
Consider the following October tweet by Fidelity's Jurrien Timmer:
A look at the #SP500 since January 2017: After a mostly steady climb last year, this year has been choppy. What do I expect to see now? A trading range in the middle of the highs (around 2,900) and low (around 2,550). pic.twitter.com/gdauHj2jED
— Jurrien Timmer (@TimmerFidelity) October 15, 2018
My chief takeaway from this thought is that it’s possible for the perma-bull passive investor crowd to escape the current market unscathed if they look at things in a slightly different way and make definitive preemptive moves. I favor heavy cash positions and selling into strength by shorting stocks.
To recap: A market crash is highly possible, but there are ways of capitalizing on this waiting game during the interim volatility we are likely to experience.