How to Profit from the Major Stock Market Correction Coming Your Way
The stock market continues to want to edge higher, but beware. I still sense there will be more downside moves that will provide a trading opportunity. At this juncture, I would be looking for sell-offs in the stock market and chaos.
Just like what we saw in 2008 when the stock market and big banks crashed, when a stock market correction comes, there will be aggressive trading opportunities for more active traders.
Stock Markets Down, but Bigger Adjustments Ahead
The strengthening dollar will make American goods and services more expensive for exports, which will likely result in a squeeze on the profit margins of multinational companies that do much of their business in the eurozone. The dollar would likely test parity with the euro, which in itself is a trading opportunity to play the European companies that benefit from the weak euro.
On the energy front, the basis West Texas Intermediate (WTI) oil declined to the $44.00 level after news of a record surplus in U.S. crude inventories and the fear that there will not be enough storage to hold the oil. Again, we could see oil move towards the $40.00 level. Take a look at strong energy companies that are currently under distress, but may be worth a look longer-term. If you think oil will rally over the next two years, you could look at call options expiring in January 2017 that will give you ample time for oil to rebound.
On the stock market charts, the S&P 500 and DOW remain below their respective 50-day moving averages (MAs). Small-cap stocks continue to attract new buying, as the Russell 2000 is the only major stock market index positive in March and within one percent of its high. With the S&P 500 and DOW down just less than three percent from their highs, I still fully expect a bigger market adjustment.
Aggressive Trading Opportunities for Investors
The current stock market environment is volatile, which means opportunities for aggressive traders.
An example of a recent aggressive stock market trade surfaced after the collapse of Lumber Liquidators Holdings, Inc. (LL), which crashed to below $30.00 from a high of $108.40. The sell-off was driven by concerns regarding the safety of some of its laminate flooring made in China. Now, while it seemed like there were issues, you could have played a bounce via near-term call options. I fully expect continued trading on speculation about the validity of the allegations against the company.
Another example was the collapse of the Russian ruble, which resulted in a massive sell-off in the Russian stock market and stocks by 75% or more. In that circumstance, aggressive traders could have played the subsequent bounce. The easy money has been made, but I expect there will be more opportunities to trade if President Putin continues to play games with the world.
At the end of the day, traders can look at excessive stock market weakness and chaos as an aggressive trading opportunity to make some quick cash.