This morning’s 600-point neck-breaking swing in the Dow Jones Industrial Average only added to the pain of the big sell-off over the past week and a half.
And in our realm of tech, chip stocks came under especially hard pressure after the CEO of Microchip Technology Inc. (Nasdaq: MCHP) said that “another industry correction has begun.”
But you shouldn’t be joining the crowd and dumping stocks at this point.
In fact, those who are “running for the exits” will be penalized for their caution.
Tech investors like us who stay in the market, on the other hand, will be rewarded for our courage.
Today, I’m going to tell you why this moment is actually a big moneymaking opportunity.
According to Dow Theory Forecasts, “the biggest risk of investing is not being in the market when it goes down, but being OUT of the market when it goes up… Every time you pull money out of the market, you run the risk of missing those important rallies that create seven-figure portfolios.”
Here’s what that means…
The Case for Stocks
Let’s say you’d invested $10,000 in a Standard & Poor’s 500 Index fund at the beginning of 1980.
At the start of this year, you’d have had $439,394. However…
If you had sat out just the best five trading days, you would have started 2014 with just $284,481. That’s a wealth difference of $154,913, or nearly 35%.
If you’d been on the sidelines for the best 10 trading days, you’d be out $227,506, or 52%.
And if you’d missed the best 60 days? Then you’d finish 2013 with only $27,201, a difference of almost 98%.
In other words, the best time to get out of the market is never.
Today, I’m sharing with you some very fundamental reasons why I think this is a temporary sell-off – and not the start of a bear market.
And I’m laying out the three-part strategy that I use during tough stretches like this – and that you can use to pump up your portfolio.
Moreover, I’ve found the one investment that will act as “volatility insurance” for the rest of your investing life.
We’re Not Panicking – We’re Gearing Up
Before I detail my three best tips, I need to tell you how we got to this point.
While the situation is complex, I believe what we’re witnessing right now boils down to two primary fears.
First off, investors are worried about the U.S. Federal Reserve‘s decision to taper its historic levels of bond buying, also known as quantitative easing (QE). They think that’s going to hurt the market.
Investors are also convinced the deteriorating conditions in Europe will infect the U.S. economy. And fresh fears over Ebola and ISIS are not helping matters.
Both of those concerns are misplaced – meaning that much of this recent downturn is a psychological phenomenon leading to fear.
We, on the other hand, are not panicking.
So, I’d like to tell you why I think much of the fear I see today is misguided. Let’s start with the Fed.
Banks have been hunkering down as a group in order to build up reserves well above what they are required to support all the loans they’ve made. This liquidity trap, also known as “pushing on a string,” is exactly what we’ve seen in recent years as bankers rebuilt their balance sheets after the financial crisis of 2007-’08.
Yes, until late last year the Fed had been buying $85 billion a month in bonds and mortgage-backed securities to flush the economy with fresh cash. That’s the QE program I mentioned before.
But much of the money has remained in bank vaults. A study from the St. Louis Fed shows excess reserves at depository institutions in September hit nearly $2.7 trillion. To put that in perspective, the figure is more than 10 times the excess reserves on hand in March 2008.
Thus, I don’t think the stock market’s great track record since March 2009 can be explained by the Fed’s easy-money policies alone.
What’s more, the Fed is already talking about delaying any imminent interest rate hikes. I think that’s bad policy; however, that should stop this dip from turning into something worse.
And knowing that, and being able to invest with confidence because of that knowledge, gives us an edge over the fearful.
That brings me around to fears about the U.S. economy – which is actually doing very well.
Just take a look at our gross domestic product (GDP). In this year’s second quarter, GDP grew at a 4.6% rate. That was 10% better than the 4.2% rate the U.S. Commerce Department originally projected.
When you look at what’s happening with auto sales, it’s no wonder why GDP is growing.
In the third quarter ended Sept. 30, auto sales were the best they’ve been in eight years, Reuters reports. And the research firm Autodata says industry sales rose 9% in September alone to 1.24 million vehicles.
Here’s what the auto number really mean: People don’t borrow $20,000 to buy a new car if they’re worried about losing their jobs.
Against this backdrop, unemployment in September fell to 5.9% – its lowest level since July 2008. Job growth has averaged more than 200,000 a month for 2014.
You can also see signs of consumer confidence in the nation’s booming real estate rental market. For the third quarter, rents rose 3.3% from the year-ago period to a national average of $1,111 a month, according to data from Reis Inc. It was the 23rd quarter in a row of rising rents.
Meanwhile, demand for initial public offerings remains robust. I track this because IPOs are an excellent way to see if fresh cash is still flowing into the market.
Chinese e-commerce giant Alibaba Group Holding Ltd (NYSE: BABA) launched the most successful IPO ever last month, with shares opening at a 36% premium to their offering price.
According to Dealogic, the Alibaba IPO brought the value of deals so far this year to $69 billion. That’s up 11.2% from the same period last year and puts 2014 on pace to be the best year for IPOs in a decade.
Add it all up and you see we have a very U.S. healthy economy and a stock market that can still lure fresh cash to keep the rally going.
Tech firms remain the big innovators in this country. Huge trends like Big Data and the Internet of Everything are driving this strong U.S. economy. These are unstoppable trends that will survive any short-term downturn – and thrive afterward.
And that’s why I’m helping you capitalize on that innovation by finding stocks I believe can double in price for you.
For that to happen, however, you need to keep investing – with confidence.
With the following three confidence-boosting strategies, you’ll be able to achieve that goal.
Confidence-Booster No. 1: Lower Your Exposure
There are major tech profit plays available in any kind of market. But you have to play to win – which you can’t do sitting on the sidelines.
For instance, if you’d invested in Apple Inc. (Nasdaq: AAPL) at the nadir of the 2008 economic meltdown – when the stock sank all the way down to $11.19 per (split-adjusted) share – you’d right now be sitting on a profit of 792%.
To feel more confident about staying in a down market, just cut back on the amount of money that you’re putting at risk.
I suggest cutting your standard position by at least half.
For instance, if you would normally invest $2,000 in a stock, cut it to $1,000.
That way, you can still invest for the long haul in great tech companies like the next Apple, but you also have plenty of cash available for when the market sorts itself out.
Confidence-Booster No. 2: Make Split Entries
This step involves buying a stock on a “split-entry” basis.
We’ve been doing a lot of this in my paid services – the Nova-X and Radical Technology Profits reports – and my readers there are picking up a lot of shares at a discount now because of it.
I call this strategy the “Cowboy Split.”
It entails buying a portion of your target stock at the going market price, and then putting in a lower limit price for the rest of the position you intend to buy.
Here’s how it works. Suppose you wanted to buy XYZ Digital Corp. and the stock is now trading at $100 a share. Let’s further assume it’s off by 20% from its recent high, making this an attractive entry point.
The broad stock market may be down. But you also know that if you wait to see if the stock will fall even more, you might just miss a sudden rally.
What is a savvy investor to do?
You buy half of your intended position at the market price of $100, and then put in a limit order to buy the second half at a further discount – let’s say at $80 a share.
This way, you catch any rally that occurs with the first half of the money invested, and you also set yourself up to take advantage of any more sizable declines.
Should the market trigger your “lowball” limit order, you would then have an average purchase price of $90 a share.
When the stock regains its previous price of $120, you will have increased your profits by a bigger margin – a total return of 33% versus the 20% you would have made by simply buying all of the shares at the market price of $100.
But there are additional ways to skin this cat.
The beauty of the “split-entry” system is that you can stagger your buys even more if you want. You can cut your entries up into thirds or even quarters, and stair-step your limit orders down or up to get an even bigger bang for your buck.
Obviously, the Cowboy Split method also keeps your risk lower, because if the stock market continues to go down, you at least spent less money for your shares.
And if the stock never falls, but instead takes off on a run, you still have a position in the stock and will make a profit on that.
Confidence-Booster No. 3: Play “Moneyball”
I named this strategy after the book and movie Moneyball, about how the Oakland A’s won 20 straight games in 2002 (and a division title) with a shoestring budget and no big stars in its starting rotation.
Simply put, you’re not looking for home runs; you just want to get on base as often as you can.
The more often you get on base, the more runs you have a chance to score.
And scoring is what it’s all about in the stock market, because when you check the standings of your portfolio, the return-on-investment (ROI) percentage is what matters.
Let’s say you invest $1,000 once again in XYZ Digital Corp. After the stock advances, you want to protect your gain and score – collect your profit – before any sudden outs end your time at bat.
For each investor, the profit target will vary. During strong bull markets, I advocate the “free-trade” strategy: When you double your money (make 100%) on a stock, you sell half and let the rest ride – in effect, leaving you to play with the “house’s money.”
But I think that when the market is volatile, wise investors ought to consider taking some profits by selling half their position when a stock is up 50% or even less.
At that point, you can further protect yourself by putting in a “trailing stop” in place to exit the remainder of your position if the stock falls back to your original purchase price.
If stock continues to decline and you get “stopped out” of your position where you originally bought in, you still will have collected a total gain for the entire investment.
And if your trailing stop does not get triggered and eventually the stock hits a new high, you might get a home run.
Each of these three Confidence Boosters can help you make money in any market.
And that brings me to the way you can make money even in a bear market – without having to play the tricky game of shorts and puts.
Your “Volatility Insurance” Card
On Thursday, Oct. 9, the Dow Jones plunged 1.9% – its biggest decline this year.
But on that same day, our “Volatility Insurance” card soared 7.6%.
This wasn’t a fluke. Our Volatility Insurance card has experienced big upward price spikes every day since then.
I don’t think a true stock-market correction – a decline of at least 5% to 10% – is in the works.
However, during market dips, and to prepare for such a correction, it’s always useful to have a “hedge.”
I’m not talking about the sophisticated shorts and puts hedging strategies that the Wall Street pros use.
This Volatility Insurance card is a single security that’s easy to buy.
It’s the iPath S&P 500 VIX Futures ETN (NYSEArca: VXX), which tracks the Chicago Board Options Exchange Market Volatility Index, also known as “The VIX.” Often referred to as the “fear gauge” or the “fear index,” the VIX represents one measure of expected volatility in the stock market in the 30 days to come.
In other words, “The VIX” soars in value when investors get scared – as they do when markets decline.
And because the VXX ETN tracks this fear gauge, this asset soars in value when markets decline.
That’s the insurance.
Then, when we see another dip coming, we’ll add to it and watch your portfolio rise while other investors are heading for the hills.
Just as it doesn’t pay to throw caution to the wind and ignore risk in a bull market, it also doesn’t pay to run away and hide in a bear market.
There’s a happy medium.
In the coming weeks, you’ll be using the three-part Confidence Booster Strategy to give you peace of mind.
And together, we’ll take advantage of the current buying opportunities out there. We’ll be buying on the dips – and we’ll take advantage of some low-lying fruit that we haven’t been able to reach previously.
We’ll also be taking more Cowboy Splits on new positions.
And I think the U.S. economy improving more than the rest of the world is lagging, so I expect a strong fourth quarter to end the year on a high note. In particular, I expect tech firms to have solid sales growth and high profit margins.
And I’m definitely not counting out the semiconductor sector. The chips these companies produce are the power behind Big Data and other unstoppable trends – any temporary setbacks are just that.
Intel Corp. (Nasdaq: INTC) just delivered another solid quarter, and I expect many other chip companies to do the same in the coming weeks.
So, don’t take on more risk than you can handle. But we must stay in stocks as we head into a fourth-quarter rally – we just can’t afford to miss any of those “best days.”
It’s time to get ours.