A Big Correction Short Sellers Can Profit From

Posted by Keith Springer - Keith Springer Financial Advisors

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The Increase In Volatility Spells Trouble For The Market

Summary

 

  • Severe correction looming.
  • 4th quarter setting up to be strong.
  • Nimble traders can profit short term.

This year is only 3 months old and we have already witnessed a dramatic increase in volatility and 2 short but painful corrections. I can honestly say that this has been the most difficult time in my 30 years in this industry. However, if experience has taught me anything, it’s that an increase in volatility coupled with frequent corrections usually means trouble for the market and investors.

On the economic front, we are also seeing a slight slowdown. Not a major slump indicating a recession, but on a year over year basis, we are seeing a downturn indicating that the economy will grow more slowly. This coincides perfectly with the demographic forces I discuss in my book, “Facing Goliath – How to Triumph in the Dangerous Market Ahead”, where the bulk of our population, the baby boomers, is well past their peak spending years. Unfortunately, the generation behind them, Gen-ex is not large enough to sustain their spending power, and the emergence of the next bull market generation, the echo-boomers, will require patience as they will not hit their spending stride for 5-7 more years.

Although we are overdue for a major correction, I don’t think that this is the “big one” – that cataclysmic crash that everyone is waiting for. In fact it is just that reason, that so many people are expecting a crash, that it will not happen… this time. Very simply, markets don’t crash when everyone expects them to.

The looming correction will however be agonizing enough to drive people out of the market, and then sit on the sidelines waiting to get back in but missing the advance as it rallies back. That is a classic correction and rebound.

There is one other indicator leading me to be cautious. Over the last few months, we have begun to see a major market rotation shift in leadership from growth to value and small cap to large cap. This is typically a defensive late bull market indicator.

Critical Market Strategy
It is time to err of the side of caution. Given the timing, this could be a “sell in May and walk away” situation. Although it’s important to remember that this phenomenon is never 100% accurate, and when you expect it to happen, it doesn’t. A sound strategy for this market will require investors to be very nimble, employing a tactical hands-on investment management approach.

A correction of even just 10-15% will be very painful and scare the bejeesus out of everyone, including the media. I intend to reduce risk slightly towards the end of the next earnings announcements in a few weeks. Earnings will be good and stocks will go higher. Although if they’re bad, run for the door. I will not be pulling out of the market completely because this will most likely be just a correction and not a crash.

Of course, if we get no correction and the market shoots higher, we will have sacrificed some of the upside returns. However, I am willing to take that chance. To me, this is in tune with buying life insurance. You only get paid if you die, but no one ever complains when they don’t die to get paid! If you disagree, please let me know and I will adjust your portfolio accordingly.

shapeimage 22Nimble traders can profit from strong Q1 earnings announcements in powerful growth names like Apple (AAPL), which will surprise on the upside; Microsoft (MSFT), which is the staple for every computer made; Google (GOOG), which is leading the technology war; Facebook (FB), which is the social media staple and is winning over the older crowd, the very people with money and who will not be upset by their ads. Or simply buy the market ETFs like QQQ and SPY. After earnings season, aggressive traders should be out of these names and or hedging with VIX.