Published on August 24 2015

What to Do When Markets Crash (Like They Did Today)

Stocks around the world are crashing.

The S&P 500 is down 4% today. Last week, the index fell 5.8%, making it the worst week for large US stocks since 2011. You can see the plummet in the chart below.

Meanwhile, China’s stock market sank 8.5% lower. It was the largest single-day loss for Chinese stocks since 2007.

It was the same ugly story all over the world. The Japanese stock market dropped 4.6% overnight and entered a correction (a correction is when an index or a stock falls 10% from its high). The STOXX Europe 600 Index, Europe’s version of the S&P 500, plunged 5.3%. The German stock market is now in an official correction.

Emerging markets are suffering even more. India’s stock market lost 5.9% overnight. Brazilian stocks are trading 4.7% lower. The MSCI Emerging Markets Index, which follows the stock markets of 23 developing nations, entered an official bear market two weeks ago.

The global sell-off is pummeling commodities, which were already at multi-year lows. The price of copper hit a new six-year low. And oil plunged 3% lower. It’s now trading for under $39 a barrel. Reuters reports that oil is having its longest streak of weekly declines since 1986.

This crash is scaring investors…

The VIX, a popular measure of investor fear, rocketed 46% higher on Friday. It was the fifth-largest single-day jump in the index’s 25-year history. The VIX is now at its highest level since October 2011.

•  There’s been nowhere for stock investors to hide…

Even this year’s top-performing stocks are crashing, as Bloomberg explains.

Investors are selling the biggest winners of 2015. Companies that have come to be known as the Fab Five — Netflix Inc., Facebook Inc., Amazon.com Inc., Google Inc. and Apple Inc.– have seen about $100 billion in market value erased over two days. Losses pushed the Nasdaq 100 Index down 7.4 percent over the past five days, the biggest weekly decline since May 2010.

Last Tuesday, we warned readers that the stock market looked fragile because these five huge companies were responsible for most of its gains this year.

One reader asked if this selloff means it’s finally time to short overvalued stocks. Shorting is essentially betting that a stock’s price will decline. He asked:

I’ve wanted to short both Amazon and Netflix for the last month or so. Is now a good time to get in?

We talked to Chris Wood, editor of Extraordinary Technology, about it…

•  Chris Wood agrees that Amazon and Netflix are expensive…

But that doesn’t mean you should bet against them.

Chris says you shouldn’t short a stock just because it’s expensive:

Amazon and Netflix are overvalued based on traditional metrics…

Amazon’s sales have been growing like wild, but it doesn’t make any money. Amazon has lost $200 million over the past four quarters. It doesn’t have any earnings so Amazon doesn’t have a price-earnings (P/E) ratio.

Unlike Amazon, Netflix actually makes a profit. But it’s still wildly expensive. Netflix has a P/E ratio over 200.

However, I learned long ago to never short a stock based on valuation alone. An expensive stock can keep getting more expensive for months or even years.

Chris will only short a stock if there’s a very good reason:

I personally won’t short a stock unless there’s a catalyst.

In 2011, the Chinese internet stock Youku.com was trading at a price-sales (P/S) ratio of 81. That’s insanely expensive…but again, that’s not a good enough reason to short a stock.

However, we learned that several of Youku’s big early investors had a pattern of behavior we could profit from. They tended to buy companies before they went public, then sell their shares when the price ran up soon after the initial public offering (IPO). This selling pressure would often cause a stock’s price to crash.

This was the catalyst we needed. We shorted Youku, and we booked a nice 50% annualized return.

The bottom line: don’t short a stock just because it’s expensive. Only short a stock if you know of something that could trigger a sell-off.

•  So what should you do with your money right now?

It’s generally a bad idea to obsess over daily market moves…even big ones like today.

But if big selloffs are keeping you up at night, you might want to take some money out of the stock market and spread it around to other investments.

A lot of investors think they’re diversified because they own stocks in different sectors. Maybe they own an emerging market or a European ETF. This is a good start, but it’s not enough. It won’t protect you from a major market crash.

True diversification means spreading your wealth across the globe. It’s the only way to ensure that the next major financial crisis doesn’t wipe you out.

We wrote Going Global 2015 to show you how to create this level of security.

Going Global 2015 is a 233-page hardcover book full of practical ways you can protect your wealth. These are not just strategies for the super rich. They are realistic steps every investor who is serious about safeguarding his wealth can take.

The book explains how to buy foreign currencies. It even lists the best currencies to hold during the next major financial crisis. Going Global shows you how to open a bank account in another country…how and where to invest in foreign real estate…how to safely store gold overseas.

If you’re worried the recent market crash could grow into full-blown crisis, this book is a must-read.

And right now, we’ll mail Going Global 2015 to your front door for just a small processing fee of $4.95. Click here to claim your copy of Going Global 2015.

Chart of the Day

Investors haven’t been this scared in years.

The VIX measures how much volatility investors expect over the next 30 days. It’s nicknamed the “fear index” because it rises most when investors are worried about a crash.

The VIX had one of its biggest single-day moves in history on Friday. And over the course of the week, it gained 118%. It was the index’s biggest-ever five-day spike.

Things only got worse on Monday. As we write on Monday afternoon, the VIX is up another 40%.

Greed and fear drive markets. For the past six years, greed has dominated the stock market. It’s fueled one the longest bull markets in US history.

It’s too early to call this bull market dead. But right now, the spike in the VIX shows that investors are more afraid than they are greedy.

Regards,

Justin Spittler
Delray Beach, Florida
August 24, 2015