ETF Trading: The Best Way to Hedge for “What Ifs”

It’s always important to be aware of “what ifs.”

Markets may have hit all time highs in November 2017. Optimism and confidence in markets were soaring to unbelievable heights. But we’ve seen this move before. And as I tell many traders and investors, it’s never too early to start thinking about how to protect your portfolio from potential swings lower.

That’s because if we’re not prepared, all of the gains you see today could be gone tomorrow.

In 1929, we saw similar optimism. Investors were pouring money into stocks on the idea of an improving economy. Unemployment was at historic lows.

Thousands of people were becoming millionaires every day.

Investors were mortgaging their homes just for a piece of the market action.

Stocks quickly became a “sure thing.” Investors couldn’t lose.

Or so they thought. The next thing they knew, the Crash of 1929 hit, and caught many of them off guard. A lot of money was lost.

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Unfortunately, many of us don’t learn from history because 88 years later, we’re doing the same thing, and seeing the same things that preceded the Crash of 1929.

And many of us don’t seem to really care. But that’ll cost them – again.

Just like 1929, stocks are soaring to new highs. Investors are pouring billions into stocks on an idea of an improving economy. Optimism is exceptionally higher. Unemployment is at historic lows. And up to 1,500 people are becoming millionaires each day.

The other similarity – not many are prepared for a repeat of 1929.

In fact, as many as 75% of Americans are as prepared for an eventual crash as they were in the roaring 20s. Granted, none of us have a crystal ball.

We can’t tell you with great certainty exactly when the next crash will happen.

But what we can tell you is, it’ll catch many of us off guard – AGAIN.

All as markets have become ridiculously overvalued, stretched well beyond fair valuation just as we’ve with the previous crashes in 1929, 1987, 2000 and 2008.

Stocks are clearly in a bubble

At 25.76, the S&P 500 price to earnings multiple is the highest it’s been since 2000 and 2008.

Price to sales ratios now sits at 50-year highs. Price to book ratios are back to 2002 levels. And the stock market cap to GDP is higher than where it was in 2000.

One of the most worrisome signs we’re overdue for a correction is the Shiller P/E at 31.50.

The last two times it was this high – or higher – markets crashed not longer after.

In 1929, the ratio sat at 30.

Right now, it’s back to 31.50.

We have to remember the old saying that bull markets are born in pessimism and end in euphoria, just as we’re seeing right now. The bull market just celebrated its eight-year anniversary in March 2017 – quite a sizable, long bull market by most standards.

Never before have we experienced such a rally on ultra-easy money from the global community.

We must be wary that when analysts get far too bullish as they are again now, it happens near market tops, not near market bottoms. The last time analysts were this bullish was 2008. Many called for markets to soar 11%. Instead it fell by more than 40%.

That doesn’t mean you should cash out of the markets right now.

It just means you need to be prepared.

Some interesting ways to prepare using an ETF for example include:

  • The Pro Shares Short S&P 500 ETF (SH)
  • The Pro Shares Ultra Short S&P 500 (SDS)
  • The Pro Shares Short Russell 2000 (RWM)

We’re not saying the markets could crash tomorrow.

What we are saying is that it’s time to protect your money now.

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