Market Crash Tips

by | Dec 28, 2021

Top Takeaways

Whenever major indexes near all-time highs, anxiety builds about an impending correction. With the S&P 500 hitting a new all-time high yesterday, we’re seeing (and hearing) the warning signs yet again…

The two major growth sectors of 2021 — EVs and crypto — both crashed with very little sector momentum following the drop. This leads me to believe we’re nearing a top in the markets. 

I think a big correction (if not crash) will likely occur in 2022. With that in mind, let’s go over how (and why) Evolvers should prepare for a potential market downturn.

Anxiety Builds

Any time the market is as expensive as it is today, bears start sounding the alarm. But the warnings throughout 2021 have been more substantial than in prior years…

Ray Dalio, Jeremy Grantham, Charlie Munger, Dr. Michael Burry, Jeffrey Gundlach, Tony Dwyer, Rick Rieder, and Scott Minerd are just a handful of the legendary traders who have warned of the existence of a market bubble and the high probability of an impending correction.

Adding to this, the macroeconomic picture doesn’t look great at the moment. Inflation is at a 40-year high, causing trader anxiety around the possibility of the Fed hiking interest rates and/or tapering asset purchases. 

Any hawkish moves from the Fed could devalue high-growth tech stocks (and therefore the entire U.S. stock market) in a serious way.

So with all of this bearish data coming down the pipe, where does the market definitively stand? Should traders be prepared for an epic crash? 

Portfolio Problems

Before considering anything else, we need to examine the portfolio composition of the major indexes. Because it’s the most widely-referenced benchmark, today we’ll focus on the S&P 500. 

Over the past two decades, technology has taken hold of the entire world economy. Automation and algorithms have proven themselves to be unstoppable profit-generating machines.

Nearly every successful business is now, in some way, shape, or form, a technology company. 

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The rapid rise of these big-tech giants has led to an asymmetric weighting in the index. In other words, the top 10 companies in the S&P 500 now make up over 30% of the entire portfolio.

This has caused a historically unprecedented scenario, a potential “house of cards” in the S&P 500. A single piece of seriously negative news for any one of these massive businesses could substantially affect the value of the entire U.S. stock market.

The fragility of the indexes appears more critical than ever when we take a look at some key metrics…

Examining the Warning Signs

Historically, there have been few better measures of index overvaluation than that of the legend himself, Warren Buffett.

The Buffett Indicator,” as it’s known today, measures the ratio of total stock market value to GDP. Since 1990, it’s been a stunningly accurate prediction tool when evaluating the possibility of an imminent market pullback. 

Bottom line: The Buffett Indicator has never been as inflated as it is today.

In 2000, at the height of the dot-com bubble, the indicator had a reading of 67 percent and projected that U.S. stocks were 60 percent overvalued…

Today, it reads a whopping 215 percent, projecting that U.S. stocks are 67 percent overvalued. 

Also, an E-Trade survey conducted earlier this year found that 69 percent of its clientele believes we’re already in a market bubble. This is a staggeringly high number for the generally bullish retail segment to come in with. 

Reading all of this, you might think it’s time to liquidate your entire portfolio and open a bar in Aruba … but don’t book your ticket just yet. 

To become a consistently winning trader, you must be prepared for any outcome in the stock market. And I have some tips on how to help you achieve this…

How You Can Prepare

I’ve come up with four easy steps you can take to ready yourself for a market correction:

  • Be aggressive when trading overextended charts, reversals, and failed bounces…
  • Watch closely for multi-month support cracks, like we’re seeing in the iShares Russell 2000 ETF (NYSE: IWM)…
  • Trade more conservatively on the long side…
  • Avoid speculative bounce plays (as we’re seeing lots of failed bounces)…

By simply following these four pieces of advice, I think you can potentially outperform many other traders who won’t be as prepared during a major market crash.

Conclusion

You don’t have to be a brilliant macroeconomist to realize that these are strange times in the stock market. 

The off-kilter weighting of the indexes is an unprecedented situation and traders have little to draw on historically for comparison.

But just remember this: In the stock market, there’s always an abundance of noise and a drought of reliable signals. Tune out the noise — and focus on being prepared for anything.

Meet Mark:

Mark Croock is a former accountant who after studying under Millionaire Trader Tim Sykes turned his small account into $3.19 Million in trading profits by applying Tim’s strategies to options trading.

He started Evolved Trader to pay it forward and help other traders learn how to leverage options

 

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