|From Ian Cooper, Author Trigger Point Trade Alerts The Top Ways to Prepare for an Overdue Pullback |
One of the worst things you can do is leave your portfolio unprotected.
It doesn’t matter how bullish things appear, trading without protection is a great way to lose a great deal of money. We’ve learned that with every major pullback in the markets.
At one time, markets were at all-time highs. Optimism and confidence in markets were at unbelievable heights. There was nothing but euphoria. Investors were pouring money into stocks on the idea of an improving economy. Unemployment was at historic lows.
Investors couldn’t lose. Or, so they thought.
Then the Crash of 1929 hit out of nowhere, and wiped it all out. We saw similar crashes in 1987, 2000 and 2008. And each time, many investors were so caught up in the “can’t lose” euphoria that they never bothered to hedge for the “what if.”
These days, optimism is high again. That “can’t lose” attitude is back. Unemployment is at record lows. Investors are pouring money into markets – just like we’ve seen prior to every major pullback in the markets. Making matters worse, key fundamental indicators are telling us the market is severely overvalued.
Look at the Shiller P/E, which measures market valuation.
It’s now up to 37.37, which is well above 30 set on Black Tuesday. We’re also now approaching a Shiller P/E last seen prior to the pullback in 2000. Plus, not only are the markets fundamentally overvalued, they’re technically overvalued.
In short, markets are long overdue for a healthy pullback.
While traders can always buy put options on the major indices, it’s also a good idea to hedge for increased volatility.
We can do that by investing in the Pro Shares VIX Mid-Term Futures (VIXM), Pro Shares VIX Short-Term Futures (VIXY), and the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX).