How to Prepare for a Stock Market Crash

The timing of a possible stock market crash and depression is the bazillion-dollar question right now.

Those are the main topics my readers have asked me about since my Jan. 31 column, "It's Not Time to Sell Everything - Yet."

I'm answering most of them here - and also letting you know exactly what I'm going to do myself.

Here's the start of my plan...

How We're Getting There

Markets last week, especially U.S. markets, got down to "support" levels and dutifully bounced in an orgy of lusting futures and Viagra-fueled excitement.

Higher oil led the charge.

That's worrisome. Oil may not have found a bottom. Falling 60% and then bouncing close to 20%, without any consolidation or a capitulation bottom, isn't a sure sign of anything.

A lot more buyers went "long" (bought) oil looking for a bottom than there were long futures holders selling on the way down.

stock market crashIf oil did put in a bottom and we hold between, say, $45 and $50 (based on the West Texas Intermediate spot price) on the downside, that's good. However, if we break below $43, then break $40, and it looks like $30 is a possibility, all hell will break loose.

All those new buyers loading up on oil, oil stocks, drillers, and explorers will dump their new bets like they were ticking bombs. In the process, all the longs who held on all the way down, because they were in a state of disbelief, will freak and sell, sell, sell.

That would make a crash self-fulfilling.

That could cause a stock market sell-off - a panic. Why? Because investors were very nervous when we got down to support. When oil looked better, they all jumped back in.

All those new players will jump out if the oil's-higher-it-feels-better sentiment turns to an "OMG, we were wrong" psychology. Then, if we get to support again, the same support that just held, and that gets broken, look out below. Margin calls will start rolling in.

Stocks are moving right up to resistance - we're almost there. If stocks can't break out above resistance levels and make new highs but slip this coming week, that's not good.

As far as timing, I'm first and foremost watching oil and how stocks react to oil price movements.

At the same time, I'm watching Europe. European stock markets better bounce, and European sovereign bonds better not weaken.

Interest rates rising, for any reason, will be the canary in the coal mine in Europe. With Europe's new quantitative easing program in place, neither of those two things should happen.

However, if something breaks in Europe, that's another potential market killer. Watch Europe like a hawk.

I'm watching the U.S. dollar. The U.S. Federal Reserve could ratchet up expectations for an interest-rate hike, which would cause the dollar to rise further against all other currencies. At the same time, a lot of other countries are trying to devalue their currencies to make their not-so-robust exports more "competitive."

The problem there is that emerging markets have $5.7 trillion of dollar-denominated debts.

That means they borrowed in dollars and have to convert their home currencies to pay interest and principal in dollars. Their falling currencies against the dollar could trigger defaults. If that happens, the rush out of emerging markets will make 1998 look like a day at the beach. Watch for foreign borrower defaults.

Last, but not least, by a long shot, there's China...

How about the Shanghai Composite's one-year gain of 51.29%, as every indicator in China shows the economy is slowing?

Does that make sense?

The People's Bank of China (PBC) just had to lower reserve requirements for banks. Do you get that? As the world is trying to make banks safer by making them raise reserves, the PBC is telling its banks to reserve less. Why? Because they are facing a credit crisis. If it turns full-blown, it will make the U.S.-led credit crisis of 2008 look like a warm-up act.

All these hot spots are where I'm looking for timing cues. If we get past all them, that's good, for a while. But only for a while. Unless all the structural problems underlying all these hot spots get fixed - and they won't - the water just gets hotter.

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And as the water gets hotter, here's what I'm doing - and what I think you all should be doing.

Cash Will Be King After a Stock Market Crash

To position for the possibility of a market crash, first and foremost, I always have my money - whether it's cash, investment holdings, or trading accounts - in the biggest institutions I can find.

The too-big-to-fail financial institutions might fail, but we should be able to get our money out of them because they will be propped up by the government. They have to be. They always will be.

Otherwise, nothing matters.

What if the government fails to hold them up? If that becomes the case, all those survivalists we sometimes laugh at, well, we'll be running to them for our own survival.

If the giant institutions where you park your money start getting in trouble, you'll see it in their stock prices. Get your money out if you see that happening.

I always have stops ready for all my positions. That includes bond, fixed-income positions.

Right now, I don't own any real estate. I play real estate with real estate investment trusts (REITs).

I raise my stops every time the market makes new highs. My stops (unless they're my trading account positions) aren't close to current prices. I don't want to get stopped out in a rising market. But I want out if things start falling. I can always get back in.

Someone commented, "Isn't selling everything adding to the problem?" Yes, it is. However, if you don't get out before everybody else sells, you will be the biggest loser.

I own some gold. The real stuff. Not a lot, just enough to have something solid, something that might become more valuable, or something I can use for barter if we ever get into a financial shutdown, cool-down period.

Cash is king in a crisis. And the best cash in the world is U.S. dollars. Period. I'd stick mine in a safe spot. No, I'm not telling you where.

Why sell everything? Why keep U.S. dollars?

Because when the dust settles, and it will settle, if we get the big one, and we time it right (I'm here with you) and go to cash when everything falls, buying in at the right time will guarantee (and you NEVER hear me say that word) us spectacular gains in a matter of a few years as the world heals.

One last thing, if you have your trading accounts at big, safe institutions, you can short along with me.

Because selling everything is one thing, but shorting everything else is something altogether more rewarding.

Any more questions?

A Strong U.S. Dollar in 2015 Could Trigger a Global Markets Meltdown... In early 2008 the dollar was undervalued and falling against most major currencies. Then the Fed frantically printed dollars to flood banks and capital markets with liquidity during the credit crisis. The dollar strengthened, flying in the face of conventional wisdom, and has risen ever since. Here's why it could be bad news for a lot of companies, economies, and investors...

About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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