A “Massive Selloff” Could Be Around the Corner

Justin Spittler


You better buckle your seatbelt.

U.S. stocks could soon take a turn for the worse. Most investors aren’t prepared for this. They’ve been lulled to sleep.

That’s because U.S. stocks have gone nowhere in recent weeks. The S&P 500 has hovered between 2,258 and 2,282 since the start of the year. The Dow Jones Industrial Average has also traded within a tight range.

When the markets are this calm, many investors put their guard down. They buy more stocks than they should. They lighten up on gold. They forget about their stop losses.

But Dispatch readers know that you should be extra careful when the market is quiet. After all, history has shown that periods of calm trading often precede violent moves.

Plus, investors have no reason to be complacent. If anything, they should be nervous.

Bonds are tanking. Inflation is rising for the first time in years. And a former reality TV star is about to become president of the United States.

In other words, the U.S. stock market may look calm. But a storm could be brewing below the Surface.

• Traders are betting that volatility will come roaring back…

MarketWatch reported yesterday:

Demand for one-month call options tied to the CBOE Volatility Index, a popular gauge of stock-market volatility, has spiked in the past week, a sign that some are bracing for a sharp downturn following the inauguration of President-elect Donald Trump.

In that time, investors have purchased 250,000 VIX call options with a strike price at 21, and another 100,000 with the strike at 22, according to Brian Bier, head of sales and trading at Macro Risk Advisors, an options brokerage.

A call option is basically a bet that an index or asset will rise in value.

In this case, traders are betting that the VIX, which is hovering around 12, will almost double when Trump takes office.

This is a serious red flag.

When the VIX rises, stocks fall. In this case, MarketWatch says we would need to have a “massive selloff” for these call options to become profitable.

• If stocks do crash, investors are going to seek shelter…

Normally, most investors buy bonds when stocks tank.

That’s because bonds are less risky than stocks. If a company runs into trouble, management has a legal obligation to pay its bondholders before it takes care of its shareholders.

The bond market is also deeper and more liquid than the stock market. There are more buyers and sellers. This makes it easier to get out of a position you don’t want.

• Bonds have also done better than stocks during major financial crises…

After the dot-com bubble popped, U.S. 10-year Treasurys gained 17% in 2000. That same year, the S&P 500 fell 9%. The next year, Treasurys returned 6% while U.S. stocks fell 12%.

The same thing happened during the last housing crisis. Bonds gained 20% in 2008 while the S&P 500 plunged 27%.

This is why many people run to bonds during times of panic.

Unfortunately, this “tried and true” strategy might not work the next time stocks crash.

• The bond market is a train wreck right now…

Just look at what’s happening with U.S. 10-years.

In July, this popular safe haven yielded 1.4%. Today, it yields 2.3%.

This might sound like a good thing. After all, who wouldn’t want to earn more interest? But you have to realize something about bonds. Their yield rises when their price falls.

• The bloodbath in bonds has likely just begun, too…

Right now, investors are betting on higher economic growth, inflation, and interest rates. None of these things are good for bonds on their own. Together, they’re a perfect storm.

Bill Gross and Jeffrey Gundlach—Wall Street’s “Bond Kings”—also think you should avoid bonds right now. In fact, both world-class investors expect bonds to enter a long-term bear market.

In short, the bond market isn’t a safe place to park your money. The good news is that there’s an even better way to protect yourself.

• Gold is the ultimate safe-haven asset…

Unlike bonds, gold isn’t someone else’s liability. It’s real money.

It's preserved wealth for thousands of years, and through every sort of financial calamity. No other asset comes close to matching its track record.

• Gold has jumped 6% since the start of the year…

It’s now trading at its highest level since November. But it’s likely headed much higher.

You see, despite its recent rally, gold is still cheap right now. It’s trading 11% below last year’s high. And it’s more than $800 below its inflation-adjusted all-time high.

If you’ve wanted to buy gold for protection, now’s a good time. We encourage most investors to put 10% to 15% of their money in gold.

• Once you own enough physical gold for protection, you can own gold stocks for profit…

Gold stocks are leveraged to the price of gold…meaning gold doesn’t have to rise much for them to soar.

Like gold, gold stocks are cheap. The VanEck Vectors Gold Miners ETF (GDX), which tracks large gold stocks, is 25% below last year’s high…and that’s after a big rally this year.

GDX tracks some of the biggest names in the gold business. Its top holdings include miners Barrick Gold, Newmont Mining, and Goldcorp. These are fine companies. Their shares could double or even triple over the next few years if gold keeps rising.

Most people love those kinds of returns. But instead of investing in a fund like GDX, you could make two, three, or even five times that much money by betting on the next great gold stock.

Chart of the Day

You can buy a fund for anything these days.

There are funds that track the S&P 500, the price of oil, and the U.S. dollar. There are also many funds designed to track volatility.

These funds might seem like a perfect investment if you expect the VIX to rise. But most investors should never go near them.

That’s because these types of funds don’t actually own the VIX. They own futures contracts linked to the VIX. This is very important.

You see, futures contracts eventually expire. The longer you hold them, the more value they lose.

Because of this, you should never hold a volatility fund for a long time. They’re meant for short-term trading.

Below, you can see what would have happened if you bought one of the most popular volatility funds back in July. Over the past six months, the iPath S&P 500 VIX Short-Term Futures ETN (VXX) has plunged 53%. The VIX is down just 4% over the same period.

Unless you're an experienced trader, you should avoid volatility funds at all costs. You would be much better off investing in a traditional safe-haven asset like gold.


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