I'm Bill Patalon, Founding Editor of Money Morning.
The stock market drubbing from Feb. 24 to March 6 eradicated $4.6 trillion in shareholder wealth.
Then on Monday, March 9, the S&P 500 tanked 7% within five minutes of the market opening. That triggered the first trading halt since November 2016.
All told, stocks fell by 34% between the end of February and the bottom around March 23.
That’s all thanks to the coronavirus pandemic and resulting lockdowns that sent the economy into the one of the worst recessions in decades.
But then something curious happened…
Markets rallied over the summer. In fact, the S&P 500 and Nasdaq hit an all-time highs toward the end of August.
Of course, we’re not out of the water yet. The Dow Jones still struggles to regain its highs before the crash, and volatility is creeping back into the markets.
The pandemic is still with us, and there is a threat of another resurgence in the fall and winter as flu season rolls in.
No one is certain where markets are heading next.
But that's not a reason to panic.
Just the opposite, in fact.
The reality is that you have an advantage over the average investor.
You have us. I'm going to show you, along with the expert investing team here at Money Morning, how to put a coronavirus portfolio protection plan in place for the unknowns you're facing.
The coronavirus epidemic is something economists refer to as an "exogenous shock," an impossible-to-predict event that didn't stem from the economy. The terrorist attacks of Sept. 11, 2001, are another example.
It could happen again, for all we know.
How far and fast the market will drop depends on a handful of factors.
We’ll lay out which risks you should take seriously, which are all hype, and most importantly, how you can not just protect your money, but make money in this volatile market…
One reason markets dropped so far, so fast the first time: Stocks were expensive before the sell-off.
Valuations were high. The S&P 500 was trading at 18.9 times projected earnings. That was up from 16.2 a year ago and - save for a brief moment in early 2018 - it was the highest forward P/E for the index since May 2002.
This magnifies risk at any time. But risks are particularly exacerbated when earnings forecasts begin to wobble.
Companies across every industry have been cutting earnings forecasts through the year. Goldman Sachs analysts estimate corporate profits could drop 13% this year. They had previously expected profit growth of 7%.
Slowing growth stokes fears of a recession, which can trigger selling.
Investors dumping stocks could exacerbate economic worries in a visible, but ancillary, way - by prompting consumers to further cut back on spending.
That, in turn, will further squeeze corporate earnings, leading to additional share-price declines - with this cycle feeding on itself until a "bottom" is reached.
While all of this is concerning, it's more important than ever to keep it in perspective.
As the saying goes, "Stocks take the staircase up and the elevator down." So the drops always feel much more painful and sudden than the gains.
Don't get blinded by the near-term headlines. Yes, the markets will likely dip more. But maintain a long-term focus.
Here are six key steps for what to do first:
This is a truly historic opportunity. And it's not enough just to make "profits." You want to amass true "wealth."
Ignore the near-term "scare headlines." Don't let anyone talk you out of this opportunity. And that's what it is - an opportunity.
With that in mind, our investing team put together five key moves to successfully coronavirus-proofing your portfolio. I'll hand it over to them.
Move No. 1: Protect What You Have
The first thing we tell our readers to do when buying shares is to set the trailing stop. Trailing stops, if you haven't used them before, are a type of stop order that will automatically sell your stock after dropping a certain percentage. If you set a 20% trailing stop, you'll be stopped out of your position if the stock falls 20% from its high.
Instead of having to time the markets yourself, trailing stops will automatically sell your positions for you at your desired percentage.
By setting a trailing stop between 10% and 20% on all of your stocks, you'll preserve your wealth when markets act irrationally.
Now's the perfect time to tighten them up on all your holdings - make sure they're at the right level that you want. And if you got out of your positions already, make sure they're set for your desired level when you get back in.
This is also a great time to take profits on any stocks that have vastly outperformed.
When markets act like this, even great companies can get dragged down with the market. By taking some profits, you can redeploy your capital into "safer" investments - or wait and get back into the same stock at a lower price.
This is not the same as panic selling. This is measured, deliberate selling to give you some cash if you need it. You'll be able to buy back in, too, which lowers your cost basis and leads to much bigger long-term profits.
For increased stability right now, consider owning a little gold.
You don't want to put all of your money in gold, but a small allocation between 2% and 5% is a good balance to volatile stocks.
At Money Morning, we like the SPDR Gold Trust ETF (NYSE: GLD). It's liquid, reliably tracks the price of gold, and has a low fee structure. You get the benefit of owning gold without the inconvenience of having to store it.
If you do want to own gold, consider purchasing gold coins, like American Eagles. They offer a convenient and cost-effective way to add physical gold to your portfolio in several denominations of your choosing: 1/10th-oz., 1/4-oz., 1/2-oz., or full 1-oz. coins.
You can buy gold bars as well, although storage is not a viable option for everyone. Storing a large amount of gold or silver will come with overhead costs, whether you choose to let bank vaults act as custodian or you buy your own secure safe to keep at home.
Besides gold, you can also use silver or platinum as "safe haven" investments.
Another great way to "hedge" your portfolio is buying inverse funds. These specialized funds are designed to move in the opposite direction of the market, so their prices rise when their correlating index loses value.
One example is the Rydex Inverse S&P 500 Strategy Fund (RYURX). It climbed 9% the last week of February, when the S&P 500 fell a jaw-dropping 11.5%.
Or the Short Russell200 (RWM), which climbed 9.9% the same week.
Keep in mind that inverse funds are short-term plays. When markets recover, they will decline in value.
Protecting your portfolio also means ditching any "toxic" stocks you might be holding on to...
Move No. 2: Toss Any "Portfolio-Sinking" Shares
You want to get rid of the stocks that are most vulnerable right now - like Carnival Corp. (NYSE: CCL), which lost more than half its value through just over three months this year.
Now, we're not advocating you sell your entire portfolio and sit on cash. That could end up costing you even more money.
But there are some stocks that can turn "toxic" in another downturn. These are companies the coronavirus is going to hurt the most, just like Carnival. Their losses will get even worse if coronavirus cases continue to rise in the United States.
First up is Wynn Resorts Ltd. (NASDAQ: WYNN). The stock dropped 45% in a six-week span starting in January, and it could get even worse.
Two of Wynn's biggest properties are in Macao, a city in southern China. China was the epicenter of the coronavirus outbreak. Travel within the country has been limited as the government tries to get the pandemic under control. China claims to have recovered. But with the virus being so unpredictable, the world is still on its toes. If the country gets another outbreak down the road, Wynn is in trouble.
Macao closed all its casinos for two weeks in February, but business is unlikely to spring back to life quickly even though they're able to open again.
China's response included quarantining cities of millions of people and shutting down travel routes on airlines and trains. That, combined with the economic effects of the virus, puts a damper on leisure travel to China's premiere casino resorts. Plus, international travelers are less likely to choose China as a destination with the outbreak still alive.
Wynn's Las Vegas casino resorts won't be a backstop for the company's revenue either.
Americans are less likely to congregate in confined spaces like casinos or the airlines they need to get there. Las Vegas relies heavily on international tourists, including those from China. About 4% of Las Vegas's international visitors are from China.
Until the outbreak is completely under control and we see signs of travel and tourism growing again, Wynn isn't worth the risk of owning.
American Airlines Inc. (NASDAQ: AAL) is next on our list. Travel bans, fears of a pandemic spreading across borders, and travelers preferring to stay home are all obvious reasons shares of American Airlines stock tanked 51% from Feb. 12 to March 9.
The coronavirus hit the airlines especially hard due to their business model.
Warren Buffett once said the "the worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money." He was talking about airlines.
And with American Airlines' razor-thin margins of just 3%, well below the industry average of 9%, it's no wonder Buffett said investors would've been done a favor if Orville Wright never made it off the ground.
WARNING: 22 million shares of this stock trade hands every day – make sure you’re nowhere near it. Click here for the ticker...
Thanks to the high competition from low-cost carriers, huge capital costs, and susceptibility to shocks like the coronavirus, airlines have been notoriously hard to make money on.
Even worse, American Airlines was rated the worst airline for long-haul travel last year. That already meant American Airlines was battling for coveted long-distance passengers. Now even fewer people are willing to book air travel until the pandemic is over.
We'd stay away until the company can show consumers are coming back to air travel.
Our next stock to avoid might surprise you. In fact, it was one of the most popular stocks of the last year.
Walt Disney Co. (NYSE: DIS) was one of the breakout stars of 2019. The stock soared by nearly 40% in 2019, after the unveiling of the Disney streaming service as a new competitor with Netflix Inc. (NASDAQ: NFLX).
But Disney is giving those gains back in the wake of the coronavirus.
It might not seem like it, but Disney is exposed to the pandemic on two fronts.
Disney gets about a quarter of its revenue from its parks, experiences, and products segment. That includes traveling shows like "Disney on Ice" and destinations like the Walt Disney World Resort in Orlando, Fla., and Disneyland in Anaheim, Calif. Plus, Disney operates its own cruise line.
As we mentioned above, customers aren't flocking to these big-ticket destinations as long as the coronavirus is still spreading. The same catalyst tanking Carnival and Wynn right now is lopping off a huge section of Disney's revenue too.
And Disney's studio segment is taking a hit, too. The company makes 45% of its revenue from its media and studio products. Disney owns film studios like Pixar, Disney Animation, Marvel Studios, Lucasfilm, Fox Searchlight, and 20th Century Fox.
Movie studios are facing grim prospects as customers are avoiding theaters. The latest James Bond movie - "No Time to Die" - had its release date pushed all the way back to November. The film was initially supposed to debut in April. The studio is afraid fears about the virus will continue to hurt revenue. You can expect to see more studios follow suit, including studios Disney owns.
Disney's revenue and earnings are still recovering, and we don't know if we've seen the worst of it. If the virus continues to spread in the United States, we might not see companies with exposure to it recover until a vaccine is widely available and the public feels comfortable again. That won't be until next year.
Move No. 3: Make a List of Healthy Companies to Buy
The coronavirus does not mean that global growth will suddenly grind to a halt and stay there.
It can be hard to remain calm in this situation, but it absolutely bears repeating: Global growth may slow, but it will not stop.
Just look at the following chart. It shows the global expansion of capital throughout history.
But that also doesn't mean you should start blindly buying into stocks that have just sold off, either.
That's why we created the following criteria. With these six parameters, you'll find companies with rock-solid fundamentals that act as excellent stores of wealth:
A great example of this screen in action is Lockheed Martin Corp. (NYSE: LMT).
The stock was beaten down mercilessly in the crash. On the surface, that looked terrible, but the business case remains rock solid:
The company has top line growth from $47.25 billion in 2016 to $59.8 billion in 2019, and that's not something that will simply vanish... virus or no virus, no matter who's in the White House, no matter what the Fed does next.
For more strong stocks to buy, Money Morning Executive Editor Bill Patalon suggests looking at how China's economy progresses following the worst of the COVID-19 global spread...
When the SARS epidemic hit China back in 2003, it ended the year as a $1.33 trillion economy.
Last year, China's gross domestic product (GDP) came in at an estimated $14.3 trillion.
In other words, despite "slowing" growth - and even with that nasty SARS epidemic - China's economy is 10.75 times bigger today than it was less than two decades ago.
China will make it through this mess, too.
"I'm a big believer in the long-term potential of China - a country I lived in and worked in as part of a business journalist billet back in the mid-1990s," wrote Bill. "I believe that Alibaba Group Holding Ltd. (NYSE: BABA) - an e-commerce heavyweight - will help with that transformation."
Indeed, Bill sees a huge future for Alibaba. He calls it the "Single-Stock Wealth Machine."
"This is a stock you want to own long term - because it's a pure China wealth play," says Bill. "That's why I rate it as an 'Accumulate' stock. In other words, you establish a foundational position - and keep adding to your stake on pullbacks (such as the one we're seeing now) or as you get more cash."
This is also a great time to buy into one of our favorite stocks, Apple Inc. (NASDAQ: AAPL).
AAPL shares have fallen because of the manufacturing disruption in China, but this is a short-term problem, not a long-term one.
Plus, Apple is not just a device company anymore.
That is, it's not unit sales of Apple devices that are driving the company's growth. It's the services Apple delivers to the devices people already own.
Sales of those services, including Apple Music, iCloud, and the App Store, hit $12.5 billion in the last quarter of FY2019. That puts the company on pace for a record $50 billion annually.
But it won't be "devices" that continue to push Apple's revenue numbers higher.
Apple has been angling for an entrance into the healthcare industry, which will be a massive catalyst for the stock. In the United States alone, the medical market for smart devices is estimated to be $300 billion.
Outside of healthcare, Apple's services are expected to grow rapidly over the next few years. Morgan Stanley estimates revenue from Apple services will more than double from $46.3 billion in FY 2019 to about $100 billion in FY 2025.
Another stock that's a great long-term buy and hold at discounted prices is Intuit Inc. (NASDAQ: INTU).
Nothing is certain but death and taxes. So naturally, the top provider of tax preparation software is one of the most dependable investments you can make.
That said, Intuit is much more than its wildly popular TurboTax software. Its QuickBooks software has long been a favorite of small businesses. And in 2014, it launched QuickBooks Self-Employed, tapping into an enormous and growing market.
Freelance work now accounts for $1.4 trillion annually and is growing three times faster than the overall labor force.
Intuit's EPS grew by 17% in the 2019 fiscal year, and according to FactSet, it's expected to increase by double-digit percentages in each of the next two years.
As the workforce changes over the next decade and more, Intuit is going to be one of a small number of companies prepared to reap the rewards. That makes it one of the best stocks you can buy now.
Move No. 4: Buy Slowly and with Discipline
In unique situations like we have today, it's not a time to "back up the truck" and load up on stocks all at once.
Instead, you want to buy a handful of shares at a time, inching into positions that you want to hold for the long term.
It's unlikely you'll time the bottom perfectly. But adding shares at a regulated price every week will let you lower your cost basis over time. You can use a tactic we suggest called dollar-cost averaging. It's extremely effective in building long-term wealth.
Dollar-cost averaging achieves two important goals:
(1) It takes emotion out of the equation. You don't try to decide when to buy - you invest automatically.
(2) It lowers your cost basis over time. Because this technique forces you to buy more when prices are low, your average price per share drops.
If one month your stock is trading at $50, and the next at $51, and the next at $48, your cost basis would be $49.66.
Dollar-cost averaging is a great technique for lowering your risk and setting yourself up for profits at the same time.
Move No. 5: Use Options to Trade Volatility
The market reversals are dizzying, but this movement is also perfect for trading options as a way to offset your (temporary) stock losses.
Here is some guidance on how you can trade this market.
The first thing you'll want to focus on is when to make your move.
We suggest watching the VIX - the market's volatility index, which you may have heard referred to as the "fear gauge." Look for a sustained fall using an indicator like "Relative Range," which I'll show you in the following chart.
The values are less important than the break above statistical norms and the high of 49.48.
Volatility broke well above anything even remotely resembling rational behavior during the crash.
The "why" doesn't actually matter, so don't spend a lot of mental energy on that. Just that it has happened is what you want to focus on.
The VIX Index, in case you're not familiar with it, is a calculation measuring the expected volatility of the U.S. stock market based on real-time, mid-quote prices of S&P 500 Index (SPX) options.
High VIX readings imply a greater expected move in the S&P 500, while lower VIX readings imply a smaller move.
Generally speaking, VIX readings do not remain higher than normal (which for the past few years has been low- to mid-teens) for long periods of time, for statistical reasons we'll go into another time. What you need to know is that high VIX readings can fall quickly.
It's because of something called "mean reversion." That basically signals a return to the mean every time the VIX moves sharply in either direction.
Keep in mind, though, you'll want to be selective because the VIX can spike at times that do not match up to a steep sell-off or a possible low. Those are signals you don't want to take. It can also drop even though angst remains high, like it is presently.
Generally speaking, abnormally high VIX readings can be used to judge the potential for a major market reversal... which may be closer at hand than many panic-hazed folks think.
And here's what you do to play that...
Aggressive traders could tap into that by purchasing "at the money" (ATM) S&P 500 calls, ATM SPX call options. At-the-money calls are those where the strike price is the same as the underlying stock.
Conventional thinking is to buy "out of the money" - OTM - call options, but we aren't fans of that generally because this trade is intended to capture as much of the move as possible as fast as possible.
Keep risk low by using a smaller-than-normal position size before you make your move, though.
This trade will lose money quickly if the markets keep going south. We suggest a time-based stop, rather than the usual dollar or percentage versions we talk about most of the time.
You're also not out of luck if you don't like options or simply aren't familiar with 'em.
Aggressive investors could consider nibbling into the SPY, an exchange-traded fund that tracks the S&P 500, while using dollar-cost averaging to control your entry and your risk. There's also a leveraged ETF like the Direxion SHS ET/Daily S&P 500 Bull (NYSE: SPUU), which moves 2x to any corresponding move in the S&P 500 if that's more your "speed."
This, too, is a one-trick pony, so the same risks apply. Only use money you can afford to lose if the markets have other ideas.
LEAPS stands for "long-term equity anticipation securities" - basically long-term options with expiration dates typically longer than one year away. Doing so, as opposed to buying the stocks that interest them directly, costs less money and can deliver super attractive profits if there's a turnaround.
For example, let's look at Apple Inc. (NASDAQ: AAPL) when it was trading at $268.25 earlier this year. Buying 100 shares would have set you back a cool $26,825. However, an AAPL June 17, 2022 $260 call (AAPL220617C00260000) would have cost you only $5,600, or $21,225 less.
Let's assume that Apple rises to $400 by June 2022. That would represent a 49.11% return on the stock. But the LEAPS buyer would be looking at an appealing 64.68% for every LEAPS call purchased.
There are some caveats, though.
LEAPS buyers have to contend with something called time decay, meaning that the value of the price of the option they've purchased declines as the option moves toward expiration. At the same time, they'll have forgo dividends that would otherwise be in their pocket if they purchased the stock outright.
We suggest looking at "redemption" stocks - those poised for a turnaround story when market conditions improve.
Take Boeing Co. (NYSE: BA), for example. Using the VIX will be your cue that the broader markets could be nearing a turnaround, it's one of the most loved/hated stocks available to the investing public at the moment.
The MAX 737 situation was poorly handled from the get-go, and the stock probably has a quarter (or three) to go before things get better, so you can count on indiscriminate selling to scare the pants off normally staid investors. All of which puts the company "on sale."
Boeing has LEAPS options just like Apple does, so that's one way to go after the trade, but you can also sell "covered puts" against the stock to obtain an even deeper discount to where shares are trading today, assuming you actually to want to buy it.
For instance, at the end of February, the BA Jan. 21, 2022 $250 puts (BA220121P00250000) were selling for around $35.20 per contract, which means that every put you sold translated into a cool $3,520 in your pocket immediately. The stock has a roughly 50/50 probability of dropping that low, according to the options pricing model we use.
Normally, we try to sell puts with about a 75% probability of being out of the money at expiration, but the fact that the VIX is so high suggests a similar-thinking trader could get closer to the proverbial fire without being burned, or at least singed.
This is an important distinction because this trade is really based on where Boeing won't be - below $250 on Jan. 21, 2022 - rather than where the stock will be at some point in the future, as is the case with Trade Idea No. 1 and No. 2.
This trade requires margin, meaning you're on the hook for the money needed to buy 100 shares for every put option you sell. That requirement varies by broker, so simply make sure you have enough cash available to buy if you need to for any reason. We don't use a strategy like this one unless we actually do want to buy a stock.
There may be more selling ahead, but we don't think it's too early to start thinking about buying off a bottom if the VIX is accurately communicating that possibility.
Until that's clear, keep risks small, and only put speculative capital to work on trades like these.
The risks are still there, but so is the potential for some extremely juicy profits.
These investing strategies are the perfect way to weather any market.
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One final note…
Almost no one realizes, but some of the most dangerous, portfolio-wrecking stocks are also some of the most popular picks on the market.
Our chief investment strategist is going live and shining a light on the specific stocks that should be nowhere near your portfolio.
In this fast-paced lightning round event, he’ll also detail the stocks that every investor in the world should have in their portfolio right now.
This event could revolutionize how you make money this year. Watch now...
