Stock Market Crash Alert: What to Do to Protect Yourselves
Stock-Markets / Financial Crash Aug 04, 2007 - 04:09 PM GMT
Martin Weiss writes: With the Dow down over 280 points yesterday and the dollar sinking fast, I just wanted to make absolutely sure you didn't miss my alert of this past Monday. So here it is again. All our signals are equally valid; all our instructions, equally urgent.
With last week delivering the worst stock market rout in nearly five years, millions of investors are in a state of paralysis.
They're finally beginning to wake up to the enormity of the meltdown in the housing market.
They're finally beginning see how it's impacting their stocks.
But they don't know what to do about it. Or worse, they're falling victim to stock brokers whose mantra is "hold on no matter what."
I hope you're not among them. But whether you are or not, please listen carefully and act promptly because …
Every Day of Inaction Could Cost You a Not-So-Small Fortune!
That's why we've been so stubbornly sending you warning after warning about …
"A series of shocks in U.S. financial markets that will catch most investors with their pants down" (Larry Edelson, Money and Markets , June 28, 2007 ).
"More credit blow ups and more hedge fund losses" [raising] "the risk of out-of-the-blue market swoons" (Mike Larson, Money and Markets, July 6, 2007 ).
"Chaos breaking out in the mortgage bond market" and "the dollar index at a critical breaking point" (Mike Larson, Money and Markets , July 13, 2007 ).
"The kind of price-to-earnings ratios we saw back in the heyday of the bull market, just before the 2001 collapse" with the risk of a 2,800-point plunge in the Dow (Larry Edelson, Money and Markets , July 19, 2007 ).
That's also why, Friday at 10 AM, I sent you a special flash alert .
And that's why, I'm dedicating this issue to giving you guidance you can use to help overcome any hesitation or resistance.
My main point: You don't have to "just hold," waiting for the next shoe to fall. Nor must you sit on the sidelines, missing the next round of profit opportunities. Quite to the contrary, there's a series of alternative steps you can take immediately …
Step 1 - Separate the Wheat From the Chaff!
Start by shedding the weakest sectors and assets we've been warning you about all along:
- Home builders,
- Mortgage lenders,
- Investment real estate,
- Real Estate Investment Trusts (REITs),
- Most banks, insurers and brokerage firms, and
- Companies that depend most heavily on the above.
Meanwhile, the fundamental outlook has continued to improve for the strong areas we've been highlighting …
- Foreign currencies , making new multi-decade highs, regardless of global stock markets,
- Oil , as prices approach their all-time high,
- Gold , likely to follow surging oil and foreign currencies, despite short-term setbacks, and
- Other resources , driven by the continuing rapid growth of the world's most populous nations.
Step 2 Seriously Consider the "50% Solution"!
Even for some of your favorite investments, if you're on the fence about what to do right now, consider taking profits on 50% and holding the balance.
This is not a universal rule of thumb. Nor do we recommend it for all positions across the board. But …
(a) When you've seen oversized profits in a short period of time, or conversely …
(b) When you've witnessed a worrisome setback that hints at more to come …
The 50% solution may be your most prudent approach. It helps you take some nice profits off the table. It keeps you in the market for the next round of profit potential. And, perhaps most important, it relieves the pressure you may be feeling to make a premature judgment before the dust settles.
Step 3 - Don't Try Too Hard to Time the Market
When should you pull the trigger?
We use a broad range of market timing tools. But we also recognize that even the best of tools can be superseded by powerful economic forces. An approach to consider:
1) Decide how many shares you want to sell,
2) Split them into two or three parcels,
3) Sell the first parcel immediately , and
4) Sell the balance after at least a one-day bounce.
Step 4 - Take Better Advantage of Handy Hedging Vehicles!
We've already written about these hedges extensively …
- For a quick summary, see our special Money and Markets edition entitled " Crash Protection ."
- And for step-by-step instructions, including formulas you can follow to hedge your portfolio inexpensively, download our educational supplement " How to Carefully Protect Your Portfolio in Down Markets .")
Plus, since we wrote that report, a whole new series of ETFs has become available, making it even easier for you to protect your portfolio from declines.
ProShares, which provides a comprehensive menu of these specialized ETFs for hedging , is a leader in this area. And one of the ETFs that we've been recommending is their UltraShort Real Estate (SRS).
This ETF "seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (the opposite) of the daily performance of the Dow Jones U.S. Real Estate Index."
Whenever real estate stocks plunge, SRS is designed to soar at nearly double the pace, precisely what happened last week. Indeed …
Just between Thursday and Friday, while real estate stocks fell apart, SRS surged 9.58%, the equivalent of over 1,300 points on the Dow.
As with any investment, this kind of firepower is a double-edged sword: When real estate stocks rally, this ETF will also fall at twice the speed. And, as with any investment, the best time to buy is not right on the heels of a dramatic surge like the one we've just seen.
But if you're worried about the unfolding housing and mortgage disaster melting down parts of your portfolio — as you should be — this kind of ETF, designed to surge with each new decline, can be handy insurance to own.
Step 5 - Diversify Far Beyond the Traditional Stock Market
Years ago, aside for money markets, pretty much the only game in town was stocks. So you were at the mercy of corporate earnings or the U.S. economy.
If the stock market went down, you'd usually lose. If the stock market went up, you'd usually win.
Today, you have many more choices that let you spread your wings far beyond the confines of traditional stocks — to investments that are often not correlated with the ups and downs of earnings or even the economy.
With ETFs, for example, you can buy …
- Stock sectors that outperform a lackluster market or even move in the opposite direction. Example: Mining companies that were mostly rising even as the Nasdaq or the S&P 500 sank in the early 2000s.
- Foreign stock markets, most which have left the Dow in the dust. Right now, they're taking a hit in reaction to the weakness on Wall Street. But while the decline in the U.S. stock markets could be fundamental and long term, the decline in most foreign markets is largely technical and short term.
- Commodities that have little or nothing to do with the stock market. Examples: Silver, gold, oil.
- ETFs that are invested in foreign currencies. Even if every stock market in the world goes down, there's almost always at least one major currency that's rising.
In this new sector of the ETF market, the leader is Rydex, with ETFs that track the …
- euro (FXE)
- Australian Dollar Trust (FXA)
- British pound (FXB)
- Canadian dollar (FXC)
- Mexican peso (FXM)
- Swedish krona (FXS) and
- Swiss franc (FXF)
With the dollar falling so consistently, the timing couldn't be better. So stand by. We have a research team devoted to foreign currencies, and we'll be sharing the results of their efforts very soon.
And, most important, don't forget CASH! Even with the dollar declining, you must not abandon U.S. Treasury bills or equivalent for maximum liquidity and safety.
Good luck and God bless!
By Martin Weiss
This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .
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