1 Way to Prep for a Crash

Posted by Thomas H. Kee Jr.

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I have been conducting extensive evaluations of all fundamental and technical aspects of this market, and almost everything points to an eventual crash. They key word here is eventual, but I think that sentiment resides with almost everyone I talk to as well.

Most investors believe the market will eventually pull back aggressively again, most investors have a very cautious tone, and over the past two trading sessions, it also seems that institutions have been taking profits.

The interesting part of this recent drawdown is that it happened for the same reason as the last drawdown, concern over tapering. However, the last drawdown was followed by one of the most aggressive increases we have seen all year, and this has been an aggressive year, so that means it was very significant. The last time concern over tapering faded, the market surged, so some traders are expecting the same thing again.

That past pattern of drawdown-then-surge has many traders interested in buying the market after the recent pullback, so the eventual correction that may eventually turn into a crash may not happen imminently. We are still in the middle of summer, the market can still easily be manipulated by a handful of aggressive traders and hedge funds because volume levels are light, and it has been easier to manipulate the market higher than lower this entire summer, so I do not expect them to turn sides easily.

More likely, they may try to push this higher yet again, they may try to let the market surge again, and at Stock Traders Daily we are taking advantage of that, but in the back of our minds is that eventual crash-concern, and therefore we are not holding our breath.

We are in the market for a trade on the long side off of the recent lows on Wednesday, this is a market-based play, but we did not relinquish our prior short-sector plays. We recommended ProShares UltraShort Real Estate (SRS -1.81%) and ProShares UltraShort Financials (SKF +0.34%)  about two weeks ago, each of those are up handsomely, and those were directly tied to interest rates, so the increase in rates plus the market pullback helped us realize paper gains of about 7% thus far. We are not recommending these for new buys at this time, but we are not selling the positions either.

Instead, as a market-based play we are taking advantage of the recent drawdown with a strong focus on large-cap tech, and we expect to go all in on the short side soon. This transition will be governed by market forces, but it will be directly in line with our fundamental earnings analysis, macroeconomic work, and of course the technicals. Right now we are holding two sector-short plays and a long-market play focused on large-cap tech.