Why You Should Pick Up Some Russell Put Options
The usual way to make money in the market is to buy when others are selling, and to sell when others are buying.
Or, as the oft-quoted Barron Von Rothchild said, "Buy when blood is running in the streets, and sell when the horns are blowing victory."
I've been long and strong since last December, when I was buying up junior gold plays on the cheap. In the spring, I was buying oil and riding the 3G telecom wave in emerging markets. It turned out I was correct — and had my best overall year since 2003.
The truth is I've had a very good crisis.
But I'm not here to gloat. I'm here to tell you how to profit from what's going to happen next. . .
Where has the fear gone?
If you remember, during the spring of 2009, you couldn't get a higher rate of bearish market psychology. The fear was so palatable you could smell it. People were literally jumping out of windows with their trading account records stuffed in their coat pockets.
Obviously, that was the time to buy.
But now, there is no fear. Every stock chart you look at is up 200% or more. Investors who've held through the bad times are thinking, "A few more up months and I'll be able to retire again."
But they aren't going to get it — not this year, anyway.
I'm not just blowing Dixie. This isn't just a hypothesis. I know the bears are dead because the volatility index (VIX), a great measure of market psychology, is back to historic lows.
VIX is Down
Think of the VIX as the opposite of the stock market. A year ago, it took off to record highs as the major indexes fell 50%. When the market started to calm down and the bulls took over, the VIX went back to its historical trend line at 20.
Two Year VIX
This tells me that all of the bears are wrung out of the market. And let's face it: they've been getting creamed for eight months.
The good news is put options are cheap again.
But it's not just the lack of fear that had me bearish. . . it's the Dow Jones Transportation Average, a leading indicator.
Be Bearish
The Dow Jones Transportation Average has a double top, which is a major reversal chart pattern. It means that the bulls have tried to break a certain level. . . fallen back. . . tried again. . . and failed again.
Double Top in Transports
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Dow Theory states that if the Transports break their trend line — and this is confirmed by the Dow Industrial Average — then we are in a bear market. This theory has been right 10 out of 11 times. The Industrials haven't confirmed. . . yet.
But the small caps also have a double top.
Russell 2000 — Double Top and Broken Trend
There is also a double top in the Russell 2000 — the index of the small capitalization stocks.
If you go back through market history, the small caps tend to lead the market both up and down. The idea is that they are more nimble and less defensive. Therefore, they are the first to be affected by events.
The Little Guys are Running Scared
You will also notice that the MACD had a crossover and turned negative. And the volatility has flattened out to the point that it has broken its downtrend.
I'm starting to see these bearish chart patterns all over the place. The NASDAQ has broken its uptrend as well, and looks like it is rolling over. . .
The dollar is bouncing higher — a sure sign the smart money is getting out of equities.
I recommend picking up some iShares Russell 2000 Index (IWM) put options.
I suggest the December 53 (symbol: IQXAA), which last traded at $1.40 with 23,650 contracts out. Or you may just consider switching some of your investments into cash.
Happy Investing,
Christian DeHaemer
Angel Publishing
Angel Publishing
Editor's Note: Wealth Daily has been pointing out market trends and opportunity for profit to our readers for years now. . . and our team of researchers realizes just how precious time is when it comes to gathering information, spotting trends, buying, holding, and selling. . .
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