Stocks have been in a bull market for eight years. That’s 96 months of stocks going without a drop of 20% or more.
This is uncanny.
Just for perspective, the average life span of a bull market is 57 months.
We’ve blown way past that. Now, we’re closing in on the record — 113 months, from October 1990 to March 2000.
It’s been a fun ride, no doubt. But I hate to tell you that these things don’t last forever.
The market will crash.
It won’t just ease down or “retrench.” It will crash. It will shed anywhere from 50% to 80% of its current value.
This is just how it works.
Big bull markets like this end with a bang, not a whimper.
For instance, the longest bull market in U.S. history (the one that began in 1990) ended with the tech bubble burst in 2000.
When that happened, the Nasdaq Composite lost 78% of its value, tumbling from 5,046.86 to 1,114.11.
Today, many experts are predicting a similar fate for the current bull market.
It’s not hard to see why, either.
Today’s market simply isn’t backed by fundamentals. Meaning, there’s no real economic growth that's driving stocks higher.
- China’s growth has gone from red-hot to ice-cold. Policymakers in Beijing are just trying to stay afloat.
- Europe is a mess. Central banks there have turned interest rates negative in a desperate bid to kick-start the flailing economy. But this effort is in vain with the Brexit coming fast.
- And the U.S. isn’t anything close to the economic engine that it used to be. Our policies are inadequate, and our government is dysfunctional.
Indeed, the main driver of this bull market has been the Federal Reserve’s record-low interest rates. Those rates have pushed money from more stable savings accounts into riskier, higher-yielding, speculative investments. But all this has really done is create a mirage that’s masked slack demand and stagnant wages. It’s also created a debt bubble as companies sought to borrow massive sums while paying little or no interest.
I don’t know when or how exactly this all ends. I just know that it does...
“The Most Broadly Overvalued Moment in Market History”
If you’re looking for more specific prognostications, you may look to John Hussman.
Hussman predicted both the 2000 stock market crash and the 2008 financial crisis. He started the Hussman Strategic Growth Fund and spared his investors from much of the losses in both market drops.
Today, Hussman says you can expect the S&P 500 to return no more than 1% on average over the next decade. And sooner than that, he predicts the stock market will plunge as much as 60%.
This is “the most broadly overvalued moment in market history," he says.
To back the assertion, Hussman leans on his own proprietary measure of the market — the one that tipped him off to the two previous crashes.
The metric looks at the value of all nonfinancial stocks relative to a specialized earnings measure, which Hussman calls value added. According to this measure, the market is as overvalued today as it was back in 2007 and just 5% away from its lofty valuations right before the 2000 crash.
Hussman isn’t the only one sounding alarms, either.
Institutional investors are bailing like rats from a sinking ship.
In late February, 100% of their portfolios were in stocks. Today, it’s just 70%. This means that they’re selling into the bull market (not buying), which is a bad sign.
They’re joined by some big names, too.
According to a new SEC filing, Warren Buffett is sitting on $72 billion in cash. This is an incredible amount of money to hold on the sidelines. Doing so actually costs the billionaire investing legend $29 million every single day. But he’s doing it all the same, because the market isn't a safe bet, anymore.
Carl Icahn, who’s been acting as a shadow advisor to President Donald Trump, recently increased his short positions by 600%. He’s betting as much as $4.3 million that the stock market will plunge sharply and suddenly.
George Soros just made a $2.2 billion bet that the market will collapse.
Jim Rogers is on record saying: “A $68 trillion ‘Biblical’ collapse is poised to wipe out millions of Americans.”
And the man, the myth, the legend — the Original Goldbug — Mr. James Dines is predicting a devastating market collapse that will cost retirees $4 of every $5, 80% of their wealth.
If even half of what he says comes true, the economic pain will be unimaginable.
Indeed, a replay of the 2008 panic is hardly out of the question. And this time, the Fed won’t have the capital to bail the market out. It’s been exhausted.
So, what’s an investor to do?
Well, there are a few things…
How to Short the Market
One thing an investor can do is buy gold.
During the last financial crisis, gold nearly doubled in value, shooting up from less than $1,000 in 2008 to a record high of $1,923. Next time the market crashes, gold is pretty much guaranteed to hit $2,000.
Gold is a great way to safeguard your wealth from any financial catastrophe.
You could also start buying into an inverse ETF.
These are the simplest and most conservative ways to short the market. Simply put, they go up when the market goes down, and they go down when the market goes up.
There are plenty to choose from:
- Rydex Inverse S&P 500 Strategy Fund (NASDAQ: RYURX). One of the more traditional bear funds, RYURX delivers a return opposite to what the S&P 500 does. So, if the S&P 500 goes down 5%, RYURX goes up 5%.
- ProShares UltraShort S&P500 (NYSE: SDS). This fund is leveraged to give you twice the return of any drop in the S&P 500. For example, if the S&P 500 loses 5%, this fund goes up 10%. Be warned, though — if the market goes up 5%, this fund goes down 10%.
- ProShares UltraShort Russell 2000 (NYSE: SRTY). This is a more aggressive play. Small caps are more vulnerable to sell-offs, and this fund targets the sector by delivering a return that is three times larger than any decline in the Russell 2000 Index.
And of course, you can always short the market outright.
In its simplest form, shorting means borrowing shares from your broker, selling them immediately, and then buying them back at a cheaper price. You keep the difference.
This process is fairly simple:
- You set up a margin account with your broker.
- You place your order.
- Your broker borrows the shares.
- Your broker sells the shares and gives you the money.
- You buy back the shares at a later date when prices have dropped.
In most cases, how long you stay in a short position is up to you. Traders may enter and exit a short sale on the same day. Or they may remain in the position for several days or weeks, depending on the strategy and how the security is performing.
The key is obvious: MAKE SURE YOU HAVE ENOUGH MONEY TO BUY THE SHARES BACK.
Have a stop-loss number in mind based on how much you invest. If you bet $1,000 against the market or a stock, have $2,000 ready in case it goes up. If the investment looks like it's about to double, cover it and take your loss. Also, bear in mind that you're responsible for paying any dividends accrued during the period in which you hold the short position.
Aside from that, you're not obligated to buy the shares back until you're good and ready — though some brokers may have their own rules or time limits. Generally speaking, though, you can keep your options open as long as you're nowhere near your stop-loss.
This is short selling, and you can do it with pretty much any stock, including the SPDR S&P 500 (NYSE: SPY) index fund.
With any of these options, you may have to stomach some paper losses until the market does eventually crash. But you’ll be glad you took such precautions when it happens. Properly timed short bets make millionaires overnight. It’s not easy, though. It takes gumption.
Just remember, bull markets are like an incandescent light bulb; they glow brightest just before they go out.