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When it comes to stock market corrections, the urge to sell and run for cover is completely understandable – but it's the wrong move.
Instead, when the going gets tough, the tough… go shopping.
Shopping after a market sell-off is absolutely critical to capture the maximum possible profits. Remember, the markets' powerful upward bias means corrections and even crashes will always pass into history, giving way to wealth-generating bull runs.
To capture that inevitable upside, we recommend having a list – ready at all times – of quality, must-have shares to pick up at "fire sale" prices during sell-offs.
And today, our strategists will share some of their own market-correction shopping lists, and even how to lay "profit traps" to pick them up at the price you want.
William Patalon III, Executive Editor
One company I like right now is General Electric Co. (NYSE: GE), the industrial heavyweight that's in full-tilt turnaround mode. It represents almost all the qualities I'm looking for in a stock in this kind of market.
First, I like the stocks of companies that are tied into long-term trends, and whose share prices are poised to benefit from multiple catalysts.
And GE is poised to benefit from several solid catalysts. I've shared all of them with my paid-up Private Briefing subscribers, but I want everyone to be in on this.
Some of the most important forces forming up under GE shares are "growth triggers," and the sheer volume of "insider buying" that's been happening.
GE is in several growth segments: Aircraft engines, medical-imaging equipment, power generation, water treatment and, as a great special "kicker" – the "Internet of Everything" (IoE). Demand in each of those sectors is only going to grow, so GE can take comfort in knowing there will be plenty of demand for its wares long term.
Stock Catalyst No. 3 has to do with "legal insider trading." In our 1998 Prentice Hall book, Contrarian Investing, co-author Anthony M. Gallea and I found that massed buying by insiders was the single-biggest indicator that a stock was going to move higher.
Corporate insiders, you see, sell their company's shares for many reasons: tax preparation, estate planning, and diversification are a few examples. But insiders buy for only one reason – they see a chance to make money on their own stock.
A lot of money.
Over the last 18 months, there's been a hell of a lot of buying by GE insiders.
Last year, CEO Jeffrey Immelt snapped up 40,000 shares of GE at slightly more than $25 a share – dropping a bit more than $1 million to make that happen. That brought Immelt's holdings to 1.86 million GE shares, worth about $47 million.
And Immelt wasn't alone.
Two independent GE directors – Geoffrey Beattie and James Rohr – bought an aggregate 14,000 shares between them, spending $103,000 to do so.
Three execs… $1.1 million in purchases.
This was a significant transaction. And we've seen more insider buying since then.
In April, four General Electric directors bought more than 45,000 company shares.
GE is currently trading at $25, so that means you can buy in now at a price that's equal to – or even cheaper – than the price the so-called insider "smart money" bought at.
It doesn't get much better than that.
I find it curious that this article was published adjacent to one predicting the "Super Crash".
But good advice, gentlemen.
I couldn't help but note that as well. The question is, did the proofreaders note it and do they even care?
The premise of this article is that market ALWAYS go higher after a correction or a crash.
A few questions:
If you buy after a 10% drop and the market goes down 50% or 70%, have you bought low and how happy do you think you'd be waiting for the "inevitable upside?"
Do my hypothetical loss percentages seem high? I imagine they did in 2000 also.
Do you think those who bought into the first crack in the dot com bubble when the Naz was down 8% imagined they could still lose 70%?
Do you think the people who bought in 1966 after the market had come off its highs were pleased to wait till 1982 to break even or those who bought in 1929 were thrilled to wait till 1954 to break even in nominal terms?
Remember when housing prices ALWAYS went up and the upside was "inevitable? That was just 8 years ago. Was that mantra true? No, and yet it was an absolute article of faith for the sell side crowd.
Look, there's a reason why they make marketing hypesters put the disclaimer on their promotional stuff that says, "Past performance is no guarantee of future results." Because it isn't.
ANYTHING can happen. And anyone who tells you further upside in the market is inevitable in ANY timeframe is either a fool or only interested in playing to what the crowd wants to hear.
The guy behind the "Super Crash" come on, Michale Lewitt, is spot on. This is a hopelessly distorted and dangerous market and your first thoughts ought to be around how you can preserve your capital. Risk management should be your number one priority.
But Money Morning, and related publishers, Agora, Stansberry, and now Casey are hype machines. They may talk about stop losses … which are useless by the way in a true crisis when the markets either close down or gap down … but they know people don't want hear about risk management. They want to know how to make money.
So, that's what they serve up. But its a disservice when the risk/reward profile of the market is so heavily skewed toward risk.
My advice, for what it's worth, is to prepare for one helluva beat down that continues longer than you can imagine and is far worse than you can imagine. And for those who actually have trading skills and want exposure either to the upside or downside, trade using long options and options spreads. Don't hold stock or ETFs outright. Hold a lot of cash and limit your market risk by using long options, either puts or calls, exclusively. A little money goes a long in a fast moving market when you're leveraging it via options. And if you're wrong, the loss is small.
In a market with reasonable valuations underpinned by a reasonably healthy economy, I would seldom play long options and would routinely be an options seller, but not now.
Selling covered calls won't provide enough protection in a serious washout and selling puts could be catastrophic. That only works in flat to up markets.
Bottom line: You can still be "in" the market, but with valuations this puffed up by central bank manipulation … with prices this artificially high … you'd better be careful and get your exposure the smart way. And Money Morning should be ashamed for publishing this "inevitable upside" nonsense.
Perhaps a loosely valid comparison of publications like Money Morning is with reading the Drudge Report (which I do read). As with all news and information, "let the buyer be aware and/or beware what they believe to be true". Investment advisory services with multiple "team" members who don't always agree on investment strategy or market forecasts (Stansberry is another a good example), are effectively like investment media hedge funds. Their management knows if they diversify their advisory services broadly enough between bullish and bearish views and investment strategies, something is bound to work! and they will capture a larger and more diverse readership audience. They are hedge traders in investment advisory media. This can be frustrating for the subscribers who simply want "the truth, the whole truth and nothing but the truth" in terms of market forecasting. I suppose the most annoying thing about some of the written teaser ad material is the secretive and mystical approach which is often misleading when used as bait on the hook. The most satisfactory advisory services I've come across are those which give easy-to-understand and follow stock option investment recommendations. A seasoned successful professional options trader is a very disciplined and risk-averse investor; and in the high-volatility environment in which we find ourselves now, this is a safer place to be than the typical "buy and hold" investment strategies. I think it wise to keep a high percentage of portfolio cash ready to play investment hide and seek. Buckle up… because the rest of this year will likely be a roller coaster from the top on down!