The stock market hasn’t been this quiet in decades.

The S&P 500 has gone 33 days without a 1% move. That’s the longest streak without a big move since 2014. Trading volumes across the main U.S. exchanges are also at the lowest level in more than a year.

This isn’t a total surprise. After all, many traders on Wall Street take all of August off every year.

But it’s even more quiet than usual right now. According to The Wall Street Journal, volatility has only been this low “a dozen times in the past half-century.”

The bond market is oddly calm too. On Monday, Bloomberg Business reported that 10-year Treasury bonds are trading in the tightest range since 2006.

When the market is this quiet, many investors let their guard down. They stop monitoring their portfolios. They forget to set “stop losses,” which will automatically sell your position if it starts to tank.

Don’t be one of those people.

You see, the stock market always reverts to its mean. And after nearly two months without a big move, it's stretched like a rubber band. The slightest “shock” could cause volatility to storm back and send stocks falling.

Today, we’ll share two simple ways to avoid catastrophic losses in case this happens. As you’ll see, it’s never been more important to take these kind of precautions.

• Stocks haven’t been this calm since the ‘90s…

The Wall Street Journal reported on Tuesday:

The past 30 days have been the least volatile of any 30-day period in more than two decades. Only five days during the most recent stretch saw the S&P 500 move by more than 0.5% in either direction, the lowest since the fall of 1995.

• Periods of extreme calmness have preceded some of history’s biggest selloffs…

CBS MoneyWatch reported yesterday:

In the past, this trend (quiet trading, downside volume) meant stocks tended to struggle. Since 1950, low volatility near new highs has resulted in negative short-term returns, with stocks sporting a negative average return over the month that followed.

According to The Wall Street Journal, two of the most recent times preceded major selloffs:

Previous periods of very low volatility were in early 2011, before the U.S.’s near-default and loss of triple-A status, and January 2007, a few months before the collapse of two Bear Stearns Cos. hedge funds marked the beginning of the credit crunch.

As you may recall, the collapse of investment bank Bear Stearns helped set the 2008­–2009 financial crisis in motion. This caused the S&P 500 to plunge 57% from 2007 to 2009.

More recently, the U.S government nearly defaulted on its debt in 2011. The debt-ceiling crisis, as some folks call it, caused the S&P 500 to plunge 19%.

• The VIX is at its lowest level in two years…

The VIX is the market’s “fear gauge.” It measures how volatile traders expect the markets to be over the next 30 days. When the VIX is extremely low, it tells us investors are complacent. When it's sky-high, it tells us investors are panicking.

Last week, the VIX hit its lowest level since July 2014. But that didn't last long…

• The VIX started racing higher this week…

On Monday, it jumped 8.2%. It was the biggest move by the VIX since the “Brexit,” which erased $3 trillion from the global stock market in two days.

Yesterday, the VIX jumped another 8.6%. It was up another 4% today. It’s trading at its highest level since July 7, the day before the S&P 500 began its “calm streak.”

Now, this could mean nothing. OR it could mean “something big” is about to happen.

We aren’t taking our chances.

• As we’ve been saying for months, the stock market is incredibly fragile…

For one, corporate earnings are weak. Earnings for companies in the S&P 500 are on track to decline for the fifth straight quarter. That hasn’t happened since the 2008–2009 financial crisis.

Stocks are expensive, too. Right now, the S&P 500 is trading at 18 times “forward earnings,” which measures how expensive companies are relative to their projected earnings for the next 12 months. U.S. stocks haven’t been this expensive since 2002.

• If you own expensive stocks, we encourage you to get rid of them…

If something rattles the market, expensive stocks are going to fall the hardest.

We also recommend you avoid companies that need a strong economy to make money. We see tough times ahead for the U.S. economy. When the next financial crisis hits, the average American’s standard of living is going to plummet.

Retailers, restaurants, airlines, and any other industry that depends on a healthy consumer is going to suffer.

We prefer companies that can make money no matter what happens to the economy.

• E.B. Tucker, editor of The Casey Report, is investing in companies that “feed the masses”…

You see, when the economy is slow, folks buy fewer watches. They go out to eat less. They take fewer vacations.

But they don’t stop eating. That’s why E.B. recommended three companies that put food on the table this year.

This strategy has paid off for Casey Report readers. E.B.’s portfolio is up 19% this year. He’s beat the S&P 500 nearly 3-to-1.

• In addition to owning the “right stocks,” we encourage you to own gold…

As we often point out, gold is real money. It’s preserved wealth for thousands of years because it’s unlike any other asset. It’s durable, easily divisible, and easy to transport.

Gold is also the ultimate safe haven asset. It’s survived every stock market crash, economic depression, and currency crisis in history. Investors buy it when they’re nervous about stocks or the economy.

This year, gold has taken off. It’s up 25%, and is coming off its best start to a year in more than three decades.

But lately, gold has been in a bit of a slump. It’s fallen 3% since the first week of August.

This doesn’t worry us.

Unlike most assets, gold tends to do well when stocks are crashing. Investors use gold as “wealth protection” because it has held its value through every financial crisis in history. Gold could skyrocket when the next crisis hits.

If you would like to own gold, we recommend you buy some while it’s still on sale. But before you do, watch this short video. It explains how to get one of the best deals we’ve seen on gold coins. Click here to learn more.

Chart of the Day

Bank stocks are the last stocks you want to own right now.

Today’s chart shows how different sectors have fared during every market correction since 1975. A correction is when a major index like the S&P 500 falls 10% or more from a previous high.

You can see the S&P 500 has declined by 20% on average during these corrections. Utilities, which include water and electricity providers, have fallen 9% on average. Financials, which includes banks, have plunged 24% on average.

In other words, bank stocks are the worst stocks to own during a selloff. Given how fragile the market is right now, you should avoid bank stocks at all costs.

Regards,

Justin Spittler
Delray Beach, Florida
August 25, 2016

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