These Trades Go Up when the Market Goes Down
When it comes to trading, nothing is ever a guarantee.
Markets can hit all-time highs one day, only to plummet the next. And with no crystal ball to tell what’s going to happen one day to the next, we need to be prepared for whatever may happen.
Or, we stand to lose a fortune.
2017 was one of the best years on record. In fact, it was one of the most exciting times to invest. The Dow Jones for example exploded more than 6,000 points in a year.
Stocks soared to new highs. Investors poured money into stocks on an improving economy.
Optimism was exceptionally high. Unemployment was at historic lows. Investors mortgaged their homes just for a piece of the market action.
Stocks quickly became a “sure thing.” Investors couldn’t lose.
And then it all fell apart.
Within months, the Dow Jones would plummet 5,000 points from its all-time highs. Longs, unprepared for a potential shift lower, lost thousands of dollars.
But this wasn’t a surprise for us at all.
We saw the same scenario play out in 1929, 1987, 2000 and 2008.
The only thing we were shocked by was the number of investors that were not prepared for the possibility of a substantial pullback – one we were overdue for.
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History proved the good times couldn’t last
In 1929, 1987, 2000, and 2008, markets soared before horrible stock market crashes.
Just like they’ve done for the last couple of years.
And to be honest, we were long overdue based on fundamental overvaluations.
At 33, the Shiller P/E ratio — which examines company valuations over 10 years and adjusts for inflation — was higher than it was dating back to Black Tuesday 1929.
Price to sales ratios sat at highs. Price to book ratios were back to 2008 levels. Stocks were incredibly overvalued. All as optimism was running amok. It couldn’t last.
Realizing this, smart longs made sure they were hedged in the event the markets pulled back, as aggressively as they did. One of the many ways they hedged was by trading the potential for higher volatility with three key stocks:
- Velocity Shares Daily 2x VIX Short-Term ETN (TVIX)
- The iPath S&P 500 VIX Short-Term Futures (VXX)
- The ProShares Ultra VIX Short-Term Futures (UVXY)
In fact, these are some of the top “go to” trades whenever markets get too overbought, or when volatility expectedly rises.
By investing without considering the “what if” market scenario is dangerous and costly.
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