The United States market went through a rough time for two consecutive days. On both Friday and Monday, the Dow Jones Industrial Average, NASDAQ, and S&P 500 saw declines of more than 3%. However, today, markets edged up throughout most of the trading day; only before dropping dramatically by the time the closing bell rang. Today, we'll talk about a few factors that tell us why this correction is nowhere near over, why it may be time to buckle down for an economic recession, and how you can take advantage of the trends.
Fundamental Factors That Tell Us This Correction Is Going To Get Bigger
Fundamentally, this correction is long overdue. In the midst of the 2008 economic recession, the United States Federal Reserve started a bond buying program and reduced its interest rate to dramatic new lows. While the old saying “The Federal Reserve is printing extra money” isn't exactly true, in a figurative tone, it makes sense. Bond buying increased demand for stocks, low interest rates reduced the risks associated with investing. It was a match made in heaven that was destined to fall apart. Ultimately, this plan led to better economic figures as a result of excessive risk taking in the market; causing a valuation bubble. Soon we had Amazon trading with a PE ratio of nearly 400 and Netflix did the same. Thus, since the global economic crisis of 2008, the market has grown to become unsustainable healthy.
As this balloon continued to grow bigger, there was a needle forming on the worldwide stage. The mix between the massive decline in the value of oil, economic instability in Europe, and the Chinese market correction/currency devaluation became a sharp edge that ultimately popped the United States securities balloon.
Now, since easy money is gone, investors are balancing their portfolios to minimize risk. This means that high valuation stocks are thrown away. Even stocks with decent valuations may be trashed as investors look to commodities as a safe haven.
The Bottom Line
This type of correction doesn't hit often, but when it does, it hits hard! At the end of the day, excessive risk taking in the market fueled by the Federal Reserves monetary policy has pushed the United States stock market to a breaking point; only this time, it got quite a bit more out of control than it has ever been! A wise investor told me “When you see Disney decline, it's not simply a correction, it's a recession in the making.” Well my friends, Disney fell dramatically Friday and Monday; just making it to the green today.
It's Not All Bad News
The good news is that you're a binary options trader. That means that you have the ability to take advantage of incredible gains; even in the face of declining markets. With that said, here's how you're going to want to plan your trades as markets fall…
Take Advantage Of Support And Resistance
The first thing that you should remember to do when trading down markets is to draw your support and resistance lines. When your asset reaches resistance, it's time to buy put options since you know that the asset is going to fall. When it reaches support, it's time to buy call options; riding the trends up to the top.
Keep An Eye On Valuations
The first stocks that are going to fall are going to be the highest valuation stocks. These are shares of Amazon, Netflix and anything else trading with a PE above 25 (17 and below is considered healthy). Because of the high risk associated with these stocks, you'll find most opportunities here.
Don't Forget Indices
During major market corrections, the Dow, NASDAQ and S&P 500 move in tandem. Trade them all by tracking their trends using support and resistance. Since they are positively correlated during market corrections; a decline in one will likely lead to a decline in the others relatively soon. So, a decline in any of these three is a signal for put options on all of them.
Safe Havens Are A Sure Bet
We've seen spikes in the price of gold already. Silver is also likely to climb. So, follow these assets to support; buying call options to take advantage of the resulting upward trends.
What Do You Think?
Where do you think US markets are headed and why? Let us know in the comments below!