About 25 years ago, author Jack D. Schwager wrote a book called "Market Wizards: Interviews With Top Traders," which has become an investment classic.
Had I known Shah Gilani back in those days, I would've happily nominated him to be part of that lineup.
You see, in the five years I've worked with Shah, I've come to know (and respect) the retired hedge fund manager and former trader as one of the savviest chroniclers of Wall Street's misdeeds that you'll find anywhere today.
But he's more than just a great columnist. Shah's also one heck of a market "seer" - which is the only way I can describe a guy who has the uncanny ability to predict major global market events ... to detail their precise impact ... and to cap it all off by telling you the very best way to profit.
And he does this over and over.
When I was putting together our special report "The Seven Investments You Have to Make in 2013," I was momentarily surprised when Shah Gilani told me he wanted to recommend the iPath S&P 500 VIX Futures ETN (NYSEArca: VXX), which tracks the Chicago Board Options Exchange Market Volatility Index, also known as "The VIX."
The active word there is "momentarily."
As he presented that recommendation, he carefully explained his logic - in a way that made it crystal clear.
And he promised I'd get to see that prediction play out.
On Monday, that's just what happened.
You see, "The VIX" - also known as the "fear gauge" - soared 34% Monday as worries about political instability in Europe caused U.S. stocks to plunge.
The upshot: The VIX Futures ETN that Shah recommended soared 13.7% in a single-day's trading.
That's just why Shah recommended that ETN - which he characterized as a "one-part hedge/one-part windfall profit play" opportunity for Private Briefing subscribers.
"Bill, the 34% jump that the VIX experienced was the single-biggest surge in the fear gauge since August 2011," Shah told me. "As I said when I originally made the recommendation, the chart of the VXX [ETN] looked like it had fallen off a cliff. If it had been a stock that we were looking at, investors wouldn't have wanted to touch it out of fear that the underlying company was one that was headed out of business. But we know that fear never goes away ... it only goes into hiding. And we knew it would be back."
Well, he sure was right. And despite this surge, this ETN remains an excellent hedge/profit play opportunity to add to your portfolio.
And some new research by the Bespoke Investment Group LLC (BIG) underscores why.
Monday's 34% jump in the VIX was the volatility index's biggest single-day spike since August 2011, and its 28th one-day increase of 25% or more since 1990. Bespoke studied the prior 27 such spikes, and then studied the performance of the Standard & Poor's 500 Index over the subsequent day, week, months, three months and six months.
The basic finding: While a "fear-gauge" spike may not be something to fear, it is something you need to pay attention to.
In the near-term, this isn't a cause for concern, Bespoke's research found: The S&P 500 has tended to see above-average returns over the next day and week.
But over the subsequent one-month to six-month stretches, the average returns are considerably below average. Over the next month, the S&P 500 has averaged a decline of 1.42% compared to a gain of 0.62% for all days since 1990.
For the three-month and six-month time frames, Bespoke also found that the S&P 500 has seen below-average returns.
But here's what really grabbed my attention.
In seven of those 27 instances, the S&P was within 1% or less of a 52-week high. In those cases, Bespoke said "there is validity to the argument that these kinds of surges in the VIX can represent turning points for the equity market."
For example, one month after the VIX spike, the S&P averages an additional decline of 1.55%, with positive returns less than a third of the time. And six months later, the S&P declines an average of 0.15%, with positive returns just 43% of the time.
This means the "fear index" will see some additional action. And it also means that stock selection will become more important than ever - in short, it'll be a "stock-picker's market."
Shah is the editor of the Capital Wave Forecast and Shah Gilani's DealBook advisory services.
One of his mantras - which I count among my favorites - is that "successful investors understand that it's possible to make money in every single kind of market ... there's always a way."
To see what Shah's recommending now, take a look here.
Molycorp Update: Rare-earths player Molycorp Inc. (NYSE: MCP) is scheduled to release its latest earnings report after the market closes Thursday. For the fourth quarter, analysts are looking for a loss of 31 cents per share - although it's worth noting the company has missed Wall Street's bottom-line forecast in two of the last four quarters, says Schaeffer's Research.
One thing we want to see in the report - or in the conference call that follows - is some sort of game plan with regard to the CEO's slot.
When CEO Mark Smith was ousted in December, Vice Chairman Constantine E. Karayannopoulos was named interim CEO. The "interim" title usually means that a search for a full-time successor is under way. We'd like to see an update on that search, or have at least that one bit of uncertainty removed by having the company disclose that he's taking that position in a full-fledged manner.
[Editor's Note: Unless otherwise specified, we recommend investors employ a 25% "trailing stop" on all holdings.]