Story Highlights
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- The recent rally in stocks is pushing markets to an extreme.
- This one reliable indicator is warning of a major correction by March.
- John Ross shares an easy way to supercharge your defense strategy today.
An important bearish indicator is flashing red. But most investors aren’t paying attention.
Wall Street is still riding a wave of bliss from the recent rally.
But you should take warning: The last time this alarm sounded was in the fourth quarter of 2018. The stock market went on to decline 21% before year’s end.
And in January 2018, this indicator warned of a 9% decline.
The market’s price pattern is set up for a fall now. My analysis points to an 11% decline over the next six weeks.
But you don’t need to sell your stocks to avoid this downturn. That’s because I will give you an easy way to safeguard your portfolio.
Why Wall Street’s Extreme Euphoria Spells Trouble
Take a look at the chart below. It shows the put-to-call ratio of stocks in the Nasdaq Composite Index.
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I use this chart to pinpoint extremes in market sentiment.That’s because puts and calls are tools that allow traders to bet on a stock’s direction.Puts denote a bearish bet. Calls are bullish.
So, think of the put-to-call ratio as the bear-to-bull ratio.
When this ratio reaches an extreme — as it has now — we are due for a correction.
Heavily lopsided bets mean that the trend has run its course.
The bear-to-bull ratio is at an extreme low. It tells me that bulls outnumber bears by a lot.
Too much, in fact.
When the trend reverses, stocks are set to decline.
At this stage, I don’t expect a decline to last more than two months. And the risk of a bear market starting today is low.
But traders can be proactive for as short or long as needed.
Protect and Profit When Tech Stocks Fall
If you are an active trader, add hedges to protect your portfolio when the market drops.
The Nasdaq won’t be the only index hit with a decline in the weeks ahead. Stocks in the S&P 500 Index and the Dow Jones Industrial Average will fall too.
But growth stocks are most vulnerable because they’ve mesmerized investors … and their momentum pushes the envelope on fair value. And the Nasdaq is heavy with information technology stocks.
You can target the Nasdaq with an inverse exchange-traded fund (ETF). Consider buying the ProShares UltraPro Short QQQ ETF (Nasdaq: SQQQ).
It moves in the opposite direction — and three times as fast — as the Nasdaq-100 Index. The index includes FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) and tech heavyweights such as Microsoft, Intel and Cisco.
With SQQQ, you make money while others run for the hills. An 11% decline in the Nasdaq would be about a 33% gain in SQQQ!
Good investing,
Editor, Apex Profit Alert
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