Bad News: Prepare for a Crash

The S&P 500 is at 2,094, and the Dow is at 17,854 — not far from all-time highs. The Biotech index (BBH) is at 105, down from 145 last summer.

Gold is up a bit to $1,282, silver is at $17.34, and WTI crude oil is off its recent highs at $48.54 a barrel.

Chaos

There was death and tragedy in Orlando over the weekend as an American-born Islamic terrorist killed and maimed over 100 people.

Twenty years ago, such an attack would have sent the stock market into a trade-halting tailspin. On Monday morning, as I write this, the market is fighting its way back to green.

The thinking goes that there is no way the Fed will hike rates on Wednesday in the aftermath of Orlando…

Such is the cold calculus of the stock market. This despite the fact that on Wednesday, at the Fed meeting, Janet Yellen will point to July, wag her finger, and say that’s when the hikes will happen — she really means it this time.

Like a dog going for a tennis ball that wasn’t thrown, the market will fall for it one more time and adjust its discounted price models yet again.

That said, we all know that Janet has already used up her tools and is running out of credibility. And when the next crash comes, there will be nothing she can do…

Experts Say the Market Will Die

There are many perma-bears in the world. At any given moment, you can find someone who says the market is going to crash. But a small handful of living legends have made billions by correctly betting on a market crash. I remember an interview in 2008/09 when George Soros smiled and said he was having “a very good crisis.”

Today, there are four legendary investors who are betting against the market.

Stan Druckenmiller says the bull market is exhausted and you should buy gold. He points to malinvestment from the easy money Fed and a slowing China.

George Soros, a man in his 80s, has returned to active trading for the first time since the housing crisis. Soros points to problems in the EU, the looming Brexit, and China.

Carl Icahn recently had a net short position of 149%, up from 25% last year.

Sam Zell, who increased his fortune by selling his REIT in 2006 and buying it back after the crash, is selling again. Last fall, Zell sold a quarter of his portfolio, totaling 23,000 rental apartments. He is selling more this year.

Doom

It’s it all well and good to know a market crash is coming, but what do you do about it? How do you profit like the billionaires above?

The first thing you do is move your money out of equities and into cash. A 0.25% gain is better than a 20% or 50% loss. Put 5% or 10% of your money in gold, silver, or metal miners.

But if you want to make great gobs of money while the world burns, you have to buy the VIX. It will go up exponentially when the market drops.

Let me explain: The volatility index (VIX) is a creation of the Chicago Board of Options Exchange (CBOE), and it is simple…

The VIX is a measure of expected volatility calculated as 100 times the square root of the expected 30-day variance of the S&P 500 rate of return. The variance is annualized, and the VIX expresses volatility in percentage points. It looks forward and is known as the fear gauge.

If the VIX is low and the market is high and you believe they will reverse, you can buy the VIX and profit from it.

That said, the VIX itself is geared toward institutional investors with a lot of money. It doesn’t work for the little guy. There is, however, an exchange-traded fund, the iPath S&P 500 VIX ST Futures ETN (VXX). It works much better as a vehicle for trading.

Today, for example, the VXX is up 3.31% despite the fact that the market is flat. Investors are betting that the market will go down over the next few weeks.

If you are cockier about your predictive abilities, you can buy TVIX. It goes up (or down) at about twice the rate of the VXX. Today, the TVIX is up 7.03%.

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Calls for Sanity

Or if you have some guts and really want to make some money, you can buy call options.

On Friday, in my options service Option Trading Pit, I put out this recommendation:

Time to play the volatility card…

We’ve made some money on the Volatility Index (VIX) before.

The VIX jumps when the stock market sells off. That said, the best way to play it is through the Barclays Bank PLC iPath S&P500 VIX Short-Term Futures ETN (VXX). The VIX is built for big corporate investors, and the VXX mirrors it with better trades.

Here is the one-year daily chart for the VXX:

You will notice that when the chart breaks its downtrend, it tends to launch. I’ve circled these events above.

You will also notice that the same situation is happening now. The MACD has crossed like it did in January and August of last year. The RSI has a similar upslope.

Plus, the VXX is very low. No dire events are priced into the market. Just think what would happen if the Fed hiked rates or the UK left the EU…

There are any number of scenarios that could cause the stock market to fall. Your standard summer swoon would do it.

It’s worth taking a shot on some VXX calls. I like the September 2016 16.000 calls (VXX160916C00016000). These are trading at $1.69. Put your stop-loss in at $0.75 with a one-month price target of $3.35. Good for the day.