Monday's stock-market sell-off was a frightening affair that sunk 94% of the stocks listed on the New York Stock Exchange (NYSE). Every single stock in the Standard & Poor's 500 Index fell, and the 635-point freefall experienced by the Dow Jones Industrial Average was its sixth-largest point drop ever.
But in the face of this bloodbath, subscribers to Shah Gilani's Capital Wave Forecast were treated to gains of 456%, 455%, 371%, and 197% on four of their holdings.
Just how did Gilani manage to engineer four triple-digit gains in the face of a near-market meltdown?
He predicted reversals in both the U.S. and Chinese financial markets, employed a "put" option strategy for insurance – and then watched as his predictions came true.
"If I'm going to buy insurance, I want the best insurance at this price," said Gilani, a retired hedge-fund manager who is also a respected expert on the global financial crisis. "Part of a good cost-structure analysis is timing, which is tough. So I polished my crystal ball and said: 'If something bad were to happen, when would that be?' I decided August, and chose some lesser-expensive puts."
Gilani's plan paid off with these four winners:
- A 455.56% gain from Goldman Sachs October 2011 $85 Puts (GS111022P00085000), bought June 3 for 45 cents and sold Aug. 9 for $2.50.
- A 455.24% gain from SPY August 2011 $115 Puts (SPY110820P00115000), bought for $1.05 on June 10 and sold Aug. 8 for $5.83.
- A 371.26% gain from FXI $40 August 2011 Puts (FXI110820P00040000), bought May 10 for 87 cents and sold Aug. 8 at $4.10.
- And a 196.72% gain from QQQ August 2011 $50 Puts (QQQ110820P00050000), bought June 10 for 61 cents, and sold Aug. 8 for $1.81.
"The days of putting together a portfolio and sleeping on it are over," said Gilani. "You could wake up to its value cut in half. Vigilance is the order of the day."
How to Make Money When Markets Crumble
Gilani's biggest gain came from a huge bet against banking powerhouse Goldman Sachs Group Inc. (NYSE: GS).
"It's known as 'Fortress Goldman' – strong balance sheet and unprecedented earnings – but it's not immune to what's happened to other banks," Gilani said. "Others are just a little more obvious and get a little more press. If you look under the hood, it has problems like everyone else – you just have to dig a little deeper because they hide them better."
Gilani on June 3 advised his readers to buy Goldman Sachs October 2011 $85 Puts (GS111022P00085000) for 45 cents each. At the time, Goldman Sachs shares were trading at about $135 a share. By Monday, the stock had tumbled to $117.66. That gave Capital Wave investors the chance to sell their put options yesterday (Tuesday) Aug. 9, for $2.50 a piece – resulting in a 455.56% gain.
Capital Wave subscribers also reaped a big payday on Gilani's prediction that the U.S. stock market would experience a major reversal. As investors enjoyed the bull-market run this spring, Gilani braced for what he believed was an imminent decline.
"I thought it was too good to be true," Gilani said. "I thought, 'Something's got to give.' When things look too good, and you're questioning why things look so good – it's time to buy insurance."
Gilani protected his long positions against a market reversal buying puts on the SPDR S&P 500 ETF (NYSE: SPY).
Playing a drop in the S&P went against some of Gilani's long positions, but the increasing odds of increased market volatility meant it was time to play defense.
"We were adding to our long positions, because the markets looked strong, but that's the price you have pay, going against other holdings," said Gilani. "And when they pay off handsomely, you're still in the game."
Gilani's decision to stock up on SPY August 2011 $115 Puts (SPY110820P00115000), which cost $1.05 each on June 10, led to a 455.24% gain when those options were sold Monday, Aug. 8, for $5.83 each.
But that still wasn't enough.
Gilani also bet against the Chinese markets with puts on the iShares FTSE/Xinhua China 25 Index ETF (NYSE: FXI).
"China has been tightening policy as it works to slow down its economy. And the government has had that effect – it has technically cooled," he said.
Gilani had his subscribers acquire FXI $40 August 2011 Puts (FXI110820P00040000), bought May 10 for 87 cents. Those options were sold Monday for $4.10 a share, leaving investors with a 371.26% gain.
Finally, Gilani also correctly forecast a tech-sector cool-down, which is why his fourth pick was a bet on a drop in Nasdaq-100 Index. Here Gilani exploited the PowerShares QQQ Trust (Nasdaq: QQQ), which tracks the Nasdaq 100.
"QQQ was a little overbought, technology started weakening, so I thought the Nasdaq would get hit hard," said Gilani.
Gilani on June 10 told Capital Wave subscribers to buy QQQ August 2011 $50 Puts (QQQ110820P00050000) for 61 cents. Those puts were sold on Monday for $1.81 each – a gain of 196.72%.
Turn Panic Selling Into Profit Making
Gilani has a long record of making bold predictions that come true. In July 2008, for instance, when crude oil was trading at a record high of more than $145 a barrel, he predicted that the "black gold" was destined for a major fall – even though many pundits were calling for prices to spike as high as $200, $250, $300 and even $500 a barrel.
Gilani made the correct call.
Later that same year, in the depths of the global financial crisis, Gilani told Money Morning readers about five looming "aftershocks" that could lead to major profits. Each prediction came true.
Gilani has been able to do this time and again for one simple reason: He understands the power and profit potential of the global financial market's "capital waves."
In fact, that's his secret.
"You have to look at the big picture – which is so large because the world is so interconnected," Gilani said. "To create positive returns with measured risk, you have to focus through the noise. You can't look at the markets just as the markets. Everything isn't always as it appears. You have to look at how everything is connected."
Ignoring the "noise" is a challenge during the best of times. But during a period of great uncertainty – like the one investors face now – the task can seem impossible. That's why so many investors retreat to the sidelines.
But the investors who succumb to such fears are missing out on the biggest opportunities.
That's why, instead of exiting markets totally, Gilani suggests a little more self-education, starting with a look at the global capital waves.
"It gets very muddy when you have a lack of direction and you're trying to see what's coming," Gilani said. "We've had a lot of swirling undercurrents that could pull money in more than one direction. So in the Capital Wave Forecast we have to look at how everything is connected, patterns or structures coming together or coming apart, the differences shaping up between markets, and then try to measure whether capital is moving in or out of sectors, and where it's going."
News and Related Story Links:
- Money Morning:
The Real Reason for Yesterday's Stock-Market Sell-Off
- Money Morning:
The Debt-Ceiling-Debacle: The Surprising Way a Default or Downgrade Could Crush the Global Economy
- Money Morning:
Time to Profit, Not Panic, from the Stock-Market Sell-Off